This week I have been thinking about depth.
I took a 50% drawdown on last month’s profits (meaning I lost half of what I made last month) in a span of 3 days. This happened in the first three days of this week, and the last two days have mostly been staying away from actively trading, thinking about why it happened.
The reason why I had to think about it? I’d have considered say 20-25% of drawdown to last month’s profits as normal. The last 20-25% wasn’t.
This led me to identify the most obvious culprits, because I have been going through this cycle for 2-3 loops now. I know that only after I can fix whatever is causing this loop to continue will I exit the loop and go to the next level of consistency.
Ideally, what I am trying to do is to achieve as smooth an equity curve as possible and to reduce the volatility of equity growth. That’s not to say that I am overtly micromanaging and trying to put pressure on normal growth. But when there’s scope to do it, one has to attempt the things that would lead to a better equity curve volatility.
Making 100% and losing 50% (of the profits) - while it still keeps you profitable, it is just stomach churning for most. That also points to gaps in the process that when and if filled, could lead to a betterment in the outcome series.
In my case, I have only been focusing on manual trading with a set of rules for the last 1.5 years. This comes after spending a year and a half realising that a single asset class fully systematic/algo trading cannot deliver positive QOQ and YOY returns (which is expected in a prop setting). So, there’s still a long way to go in attaining the depth in clarity around my trading style and setups I trade with.
If I were trading equity markets, the effort would have been relatively simpler as there are many role models and examples to lead the way (Pradeep, Qullamaggie, Minervini, David Ryan, etc.) But trading commodity market futures (mostly futures spreads and butterflies-based structures across the curve) is an institutional game, and there’s almost no role model that I have been able to find yet, who trades in a structured manner with a set of frameworks and rules.
So, it’s like I have to learn from across different markets and different role models and personalise, customise, and uncover edges in the markets/structures I trade, but with creativity.
For the setups I have uncovered within my markets, I need more clarity and more depth in understanding different segments of trading those setups - entry, exits, sizing, trade management, stops, trailing, etc.
It’s this that I need to work on. Throughout these three cycles (from Aug 2023) of making money and losing more than 50% of what I made and then coming back up to the prior high and then again going back to the drawdown stage, it’s been a consolidation stage. There have been several trades which went 5-10% of my account size in favor, which I allowed to come back to my cost basis stop and give me a breakeven (plus TC and slippage). If I count all those occurrences and even if I had booked partial profits in all those trades, I’d be up 2x for the year from whatever my already YTD figure is. But I’m not. Even in November, such trades if I had booked profits with half the lots, I’d have made 1.75-2x what I made in November, so the current loss wouldn’t be as much of a % as November.
The understanding now is simple. I should put in the work, or rather dive deep into specific parts of each setup I trade to attain more clarity on how to manage each setup in terms of trade management.
Just like Chhirag Kedia talks about Velocity vs Magnitude trades and how either type of trades require a separate approach for trade management, I have to figure that out. I already have the basis worked out, now the task is to do further deep dives and multiple passes at it for each aspect of the trade - entry, exit, stops, trailing, position sizing.
It definitely helps to demarcate your setups according to the expectancy. Lance Breitstein has this sizing scorecard, Pradeep has his momentum burst vs EP setups, Chhirag talks about velocity vs magnitude trades, Minervini talks about Turnover vs Big trades, and so on. But almost every legitimate trader you could learn from has certain type of trades they depend on to bring cashflow, and certain type of trades they depend on to make them big money.
Just like a business requires both volume and big-ticket products so that they are making money through both quantity as well as margin, as a trader we should also have trades where we are making money on turnover (basically a narrow edge which can be turned over hundreds or thousands of times in a year to make a big chunk of money) and on margin (trades which happen once or twice a month, which give >10R, sometimes even end up giving 20, 30, 50, 100R type returns).
So, back to depth - once we find a valid and viable structural market edge, the initial few cycles trading it is almost always going to be riddled with mistakes and points which need improvement, and definitely have a room for improvement. There’s almost no scenario in which you as a trader will uncover a structural edge and execute that 100% perfectly immediately after uncovering it. The key to getting better at execution once you have an edge is to journal your trades on a live trading basis, go through thousands of examples of that setup using historical data, and study the nuances around each aspect of the trade.
That’s what I am going to work on, as long as it takes to push the boundaries on execution to near-perfect (perfect perfection is impossible in trading).
There are several quantitative and analytical tools I have built for myself to aid my research process (tools that aren’t available off the shelf). You could say those form a decent % of my process to uncover structural edges in the markets I trade.
The main problem I face? Code. I’m a decent code hacker (writing functional code), but very bad at writing clean, maintainable, “a lay person could understand” type code. I could understand what I have written even a couple years back. But if someone picks it up, it might be difficult for them to understand.
From functions to folder structure, from writing several redundant code with slight modifications and not using reusable design patterns, my coding has been pathetic at best. This is what they call good code (code that executes and achieves its primary goal) but not great code (code that achieves sub-goals such as readability, maintainability, efficient, etc.)
So, I was thinking about how to make my coding efficient. I feel if I could code efficiently and effectively, and in a way it can be maintained and reused, with proper structure and documentation, it would be difficult short-term, but would be very very helpful long-term. When I looked up advice online, this book came up - Clean Code by Robert Martin. Skimming through this book, the book’s content and wherever it points to look like very useful advice, more so if you’re a young programmer. So, it’s definitely a useful read with a lot of very actionable advice.
This week I have also been re-reading Mark Minervini’s content and advice around trading.
Few tweets of his pointed me to some of the problems in my own trading that are currently sticking out as sore thumb. I’ll leave them for your interpretation, but this is very useful and very important advice that can only come from a seasoned professional.
