In the last two years, I developed my "holistic swing trading strategy" and frankly, until just recently, I couldn't really explain, why I have been outperforming the markets so substancially the last two years. So what I did was to take a look at the statistical distribution of my trading results. Keep in mind that I am a short term trader, so from January until August 2008, I turned around 180 trades, which is more than 20 trades per month, each of them between two days and roughly four weeks. My return in 2008 so far is up 13% with a standard deviation roughly of the S&P500, which I think is pretty decent (remember the S&P is down 10% for the year). 2007 results are even better.
Looking at some statistical values reveals some information: 47% of succesful trades, ratio of winning to loosing trades 1.5, so my average win is 50% higher than the average loss. Not bad probably for a swing trader; for a position trader, that value would be a disaster (A position trader is in the game for long trends for a couple of months, so his ratio should be much higher).
It becomes really interesting, when creating a probability distribution plot of my trading results. In my case, I'm plotting R values. The R concept is discussed by van Tharp and basically means to normalize results by the initial risk. Idea is to always risk a certain amount of money per trade. In my case, I risk 1% of my portfolio value. So let's say your portfolio is $100.000, you buy a stock for $100 and plan to sell (in case of a loosing position) at $90, the max position of that stock in your portfolio should be $10,000. Let's say, you bought a winning stock and you decide to sell it for $120. In this case, your profit is 20% or 2R.
So here is the plot of my trades for 2008 YTD:
My average R for the year is 0.15, so with every trade, my account grows my 0.15%. With 20 trades per month, I'm talking about 3% monthly return. (The actual number is smaller, since I tend to take smaller risks than what my model tells me, I plan to change that in the future)
Some intersting points:- The plot shows a "skewed" bell curve distribution, which is good. There are more "high wins" than high losses.
- In fact, 25% of losses are 1R losses (Point 1 on the chart). Maximum loss is 2R. This shows the effect of stop loss points during trading. I am using 'mental stops' and as you can see, I almost religiously execute them.
- There are some high wins between 2 and 4R (Point 2). One of the trading rules says "let your profits run". As you can see, I'm doing that (to a certain exent). I think 'let the profits run' is the wrong wording in my case (Sounds like holding positions for a long time). I prefer Sorros who talks about the need for 'home runs'.
When I look at these home runs, I see that we are talking about just ten trades. Not taking these top ten trades into account results in a return of 0% for 2008! Positive and negative Rs just neutralize each other.
When I thought about this last point, I was quite surprised. What if I would have missed them? It is easy to miss 10 trades if you do 180 of them in a certain period. But then I looked at my system and thought "that's actually great, that is the edge of my strategy: my approach is to find these big swing moves on the long or short side. These moves don't happen very often, but they DO happen. In order to find them , I need to be in the game for all the other moves. Percentage wise, the function of 94% of my trades is to keep the engine running without any return. So with 20 trades per month, I'm trying to capture one or two of these big movers. Since I'm a swing trader, I call these big movers "HyperSwings". Interesting that analysis of my 2007 results revealed the same mechanism with a litte better outcome. 8% of my trades were HyperSwings. The First half of 2007 was a entirely different market, though: trending with low volatility. So my strategy seems to be pretty robust to different market conditions.
When I started writing this post, I was a little bit reluctant to discuss the presented topic, since I felt I "give away the farm". On the other side, I saw that key to success of this trading method is persistence: even after a loosing streak of let's say 7 loosing trades in a row (which is my max loosing streak in 2008) I need to be in the game the same way. Even if I would give away all trading details, many people would trade a different way or sometimes even couldn't invest the time and
So where to go from here? I have a couple of topics I should discuss later:
- a more detailed discussion of the "HyperSwing" trade
- I also plugged my results into a Monte Carlo engine to learn more about the robustness of my strategy. Could be worth a post as well.
I can encourage every trader to start plotting his results on a PDF (probability distribution fuction) chart. You learn a lot.Do you know, what your edge is?