Learning from 2011

"Play the market only when all factors are in your favor. No person can play the market all the time and win. There are times when you should be completely out of the market, for emotional as well as economic reasons." - Jesse Livermore

A trader is always learning from the markets and their own performance. This may lead to possible refinements in their own approach.

While this current period for me has been marked by a distinct lack of activity, this is one way in which I learned from my worst year in 2011.

As I have mentioned several times on here, 2011 was a tricky year for me and my method. In that year, the general market conditions were characterised by a lack of a meaningful trend, coupled with increased levels of volatility - the worst combination for a trend follower. This led to a multitude of failed trades which started promisingly, before sharply reversing and ending up with a bunch of 1R losses.

In the early part of 2012, I took time in reviewing my approach and ending up adjusting my stop methodology as described in the addendum to my e-book. This has undoubtedly helped in cutting losing trades more aggressively than before - the average loss (in terms of R) has been reduced by almost 50% since implementing the changes.

In 2014, I have commented several times how we are currently experiencing similar conditions to those in 2011. Despite being at or close to new market highs, I have frequently been either lightly invested or out of the markets altogether due to a combination of a lack of a meaningful trend, volatility, and a number of failed breakouts in trades taken.

Seeing this, I have resolved to be more cautious than in 2011. While I am not making money when fully in cash, I am certainly not losing any by being whipsawed around in conditions where the odds are against me. To me, this cautiousness is a price well worth paying. It keeps my equity intact to benefit from more favourable conditions that will appear in the future.

I guess this year in general has been more profitable for those trading either shorter-term or longer-term than myself. That's fine - I know when things get tricky the best place to go is to cash. This also helps avoid the emotional stress when you try and fight the market.

Overtrading has been the no.1 issue I have come across when assisting other traders. People end up getting anxious when a potential new trend is signalled, and the fear of maybe missing out on profits compels them to take on too portfolio heat - they open too many trades, too quickly.  Nowadays I try to scale into new trades, which is another way I have improved my own trading since 2011, and again this approach I try and pass onto others. In a perverse way, the conditions experienced so far this year, and my continual insistence on being patient and disciplined has helped those other traders to curb the same instincts.