Revisiting my trading plan

I’ve been tracking my performance for some time now and recently completed another full year of recording my trading statistics. I am sure most of you are aware that I have been having a bit of tough time in the market over the past three months or so, so I don’t need to elaborate on exactly how rough. None the less, I have spotted a few trends in my trading performance over the past year that I intend to either stamp out, or improve on in my trading plan.

I have been making use of a volatility and probability-based trading plan. This has allowed me to get some great runs out of stocks like Telkom, Capitec and PSG. What I can now see, by making use of the historical data I have, is that during the times that the market is trending higher, my strategy tends to outperform rather well. However, during times that the market is moving sideways or coming down, my strategy takes strain, and often more than the market.

The idea is for the strategy to accumulate good quality stocks during tough times. This works very well, although I think it will work considerably better as a long-term equity strategy, and not as a short term derivative strategy. Even if the strategy works well during the ‘trending up’ times.

Knowing this allows me to be able to switch between strategies during different types of market conditions. Therefore I intend to refine my strategy over the next few weeks in order to be more adaptable to different market conditions. I need to trade more conservatively when the market is moving sideways; I need to be more willing to short when the market is moving lower; and I need to stick to what has been working, during times that the market moves higher.

I know that switching between these different trading styles is within my ability, I just need to formalise a set of (market appropriate) rules to follow. I also need to find a way of identifying the changing market conditions, so that I know when to switch between styles.

This gives me a lot of homework to do over the next few weeks. It may sound tedious and like hard work, but that’s part and parcel of trading for a living. Therefore I am more than willing to put in the time to refine and back-test strategies every year. My goal is to constantly improve my trading and this is a logical way to take stock of where I am and what I need to do in order to improve.

The most valuable lesson I have learned over the last few months is that trading is about survival. Yes, sticking to your rules is of the utmost importance and is the only way in which you can ensure that you are protecting your capital when times are tough, but every now and then we need to re-evaluate our rules to make sure they are still relevant. The market is always evolving and we must evolve with it if we hope to survive.

So I have some homework for you as well: go and look at each of your trades over the last year and try figure out how you could have done better, regardless of the outcome the trade had. It may make you feel a little stupid every now and then (as it surely does to me), but I’m sure that you will spot patterns in the mistakes that you make. Fixing those mistakes may be easier than you think.