Do you trade markets or percentages?

This question is one that i have been battling with recently in terms of one particular trend following strategy I use. June was so poor that I had literally given up using this strategy. I know, I know that i should not have done that. My back testing supported this trading system and the max draw down was up to 12% in testing.

The reason i stopped trading this system was because I had foolishly let myself believe that I was trading the market and not trading the statistics or percentages. I have always been a technical trader, in part because my tiny brain cannot possibly contain all of the fundamental information that plays out in the financial markets on a minute by minute basis. The reality of this therefore is that I have accepted that historic behaviour DOES suggest (not guarantee) future behaviour if you have statistically proven their relationship.

Following the poor month of results however I decided that even though the statistics had not changed, I would try and trade the market. Forget the back testing, forget that my trading journal was telling me I was still well within the parameters for draw downs and forget the fact that the previous month had seen a 6% return…the markets were choppy! That was it, I overturned all of this tried and tested wisdom because i thought that the ‘markets were choppy’!

The problem with failing so spectacularly to ‘honour’ your strategy is that it will cease to perform as it has done historically because you have changed your behaviour. LEt me explain using the actual example of this ‘cock up’!

My trading journal (tradersjournal.net) contains the parameters for this system and the reason I use this online tool is that it will alert me if the market changes or my system stops working. Assuming that the current performance (my inputs) are in line with the expected performance I can be reassured that my system still works. This is as long as i do not willingly change any of the variables. For example this strategy ‘expects’ 7 trades per week, per instrument and allows for an 11.4% draw down. In spite of this, there are 33% profitable trades and a return of about 30% per year. Those of you with similar strategies will know that for 33% of winning trades to make a 30% annual profit means the losses are small and the winners are big.

What i did by stopping trading, by reducing those 7 trades per week to 0, was that i changed those rules and as a result i changed their performance. I had experienced a chain of 13 losing trades (across multiple instruments) and so stopped trading. Had i traded the percentages however i would have realised that the journal shows up to 78 consecutive losing trades per instrument is NORMAL. That means that i was due a couple of winners just when i stopped trading and each winner normally covers about 5 losers.

So the results of this monumental failure to trade the percentages and to use my testing and journaling tools was a missed trade that is currently an 18.5 return on risk! This is it!

So the lesson of the story is…trade the percentages, trade your back testing, use your journal as another indicator.

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