SMSF November Performance

SMSF October Perfomance

Managed a positive month, index was down slightly. No buys or sells.

HZN Trade

HZN is a current open trade. Prices are bumping up against some significant resistance at 34c. Huge volume went through about 8 weeks ago. I like the look of it - but I also liked the look of BLY.

SMSF Portfolio Performance Sept 09

It's been a very good few months - not too hard to make money at the moment. Market is due for a retracement. I have included my Open Positions for interest. Nothing sold in September.

Statistics SMSF July 09 - Aug09

Closed Trades

This is the first post of my results. The closed trades don't look very flattering, but the account is only three months old and in this start up phase only the losers have been sold. I have 9 open positions . I will also include a Value Added Monthly Index (VAMI)report. This measure is commonly used by hedge funds to give returns based on a value of $1,000 invested. I am going to use this as I will be adding funds to this account and VAMI is a good way of tracking the underlying performance. In trading terms, this is the increase in value of total equity, which includes open equity. In strict trading terms, a lot of traders don't count open equity. Even though I fully understand that open equity is a moving target, I am interested in the total value of my account. There is no leverage used in any of my trading.

BLY Exit - C'est la vie

C'est la vie is a french saying meaning "such is life". A fuller meaning is - life is harsh, get used to it. Or in my case, the minute I start to get comfortable with a trade it all turns to ****.

What happened ?- basically the directors decided to dilute the value of the company by issuing shares at 27cents. I did say " anything can happen" which proved prophetic.

On to the next trade .......

BLY Trade

BLY (Boart Longyear)is a current open trade in the SMSF portfolio. I really like the look of this trade. Notice how after my buy signal prices pulled back for 4 or 5 weeks but volume decreased. As prices have moved up, volume has picked up. I also like the large saucer bottom prices have made over the last 10 months or so. Open profit of 45% is good, but it is nice to get a few 100% gains as these are the ones that make for a good year. Having said all that, I know anything can happen!
Fundamentally, the reason for the price rising appears to be the fact that Borat(I mean Boart) has secured funding from the banks and won't actually go broke. Small comfort if you bought in at $2.50+ as it currently is trading at 44 cents.
I am not going to post any performance figures yet, as the SMSF portfolio is too new. Total 8 open positions, nothing stopped out since portfolio started in early June.

Why do my trading systems work?

LNC (Linc Energy) represents the good, the bad and the ugly in terms of what can happen when you get involved in the markets.

All you super experienced share traders can turn off now - the following is a basic explanation of what all share traders are trying to achieve.

For the buy and hold investor it has been a roller coaster over the last two years and at the end of the day you have lost a lot of hair but made nothing from holding LNC except the lost opportunity cost of your cash.

My system has had two buys/sells in this period - you can see the signals on the chart above. Each bar on the chart represents one weeks trading, so there is no screaming hurry - unlike the emotive images that share trading conjures up. The first was a profit of about 110% in 10 weeks and second was a loss of 35% in 8 weeks. This actually illustrates exactly why trend-following systems work.

It is a matter of capturing a few big winners and limiting the losers and being able to withstand those periods in the market where there is no trend direction. Historically most of my systems have winners that are 4 times the size of the losers and with about a 50% win rate. It's like having a coin that pays $4 for a head and 1$ for a tail.

That's it! Not quite because you have to find the keys to the kingdom first and then have the patience, perseverance and risk tolerance to see it through.

MRM Exit

The MRM trade has signalled an exit for a profit of about 35%. I am not going to show this trade in my stats, as it was traded in a small personal account which I am discontinuing.

Nothing to report for the SMSF portfolio because I have 7 trades which are still open(just).

Trading Psychology

The following is a great article written by Marcus Padley . Every single destructive behavioural pattern explained can be overcome by a thoroughly researched and tested trading system provided that the system is followed religiously. It takes a lot of effort and knowledge to develop a good system, but unless you trade it as it is tested then you may as well not bother starting in the first place. I think new traders greatly underestimate how hard this aspect of trading is, mainly due to the cognitive biases explained in the article.


Tricks of the trade lead us all to feel rather than think
Marcus PadleyJune 20, 2009
MOST traders lose money. If you read some of the literature on the subject, the suggestion is that 60 per cent-90 per cent of traders lose money, depending on their level of leverage.
For retail investors, trading foreign exchange is apparently the biggest killer, followed by futures, options, CFDs (contracts for difference) and margin lending on shares. In one of these groups only 2 per cent make money and in another the average life span of a trader is six to eight weeks.
Why do so many people lose at trading? The answer is that they are humans not machines. Most traders do not think clearly and, faced with losses, gains, luck and indecision, they begin to function emotionally instead of mechanically. It is this weakness the studied professional trader takes advantage of.
This is what behavioural finance is all about. Over a large population and a significant period of time seemingly unpredictable emotions repeat, become predictable and can be exploited. For traders who understand this and trade against it, it is like owning the "zero" on the roulette wheel. An edge that will manifest itself over time.
So how do you stop other people exploiting your emotions? You change. But before you can do that the first step is to identify the common behaviour patterns that lose you money. Here's a list of some of the more common ones. In financial and social theory some of these are called cognitive biases, erroneous rules of thumb or common errors of judgement. In trading there are many. You might recognise a few of your own:
■Emotional bias — the tendency to believe the things that make you feel good and to disregard things that make you feel bad. In trading terms this means ignoring the bad news and focusing on the good news. It's called losing objectivity. You don't recognise when things go wrong because you don't want to.
■Expectation bias — the tendency to believe in things that you expect. In financial terms this means not bothering to analyse, test, measure or doubt the conclusion you expect or hope for. It is also known as the law of small numbers. Believing in something with little real evidence.
■The disposition effect — the tendency to cut your profits and let your losses run. The complete opposite of what a trader should be doing. Making small profits and big losses is a recipe for losses.
■Loss aversion — the tendency to value the avoidance of loss more highly than the making of gain. Losses affect you more than gains. Because of this you become more emotional when making losses, the point at which a rational decision would save you the most money.
■The sunk cost fallacy — this is the tendency for our decision making to be influenced by the size of the loss we have already incurred. The bigger the loss the more likely we are to persist with a losing trade rather than to take the rational decision and cut to a more profitable trade. The size of your loss has no effect on the future share price but a huge effect on your ability to make the right decision.
■The bandwagon effect — the tendency to think it must be right because everyone else is doing it. A thought process guaranteed to get you in when it's obvious and get you out when it's obvious. Put another way, it has you buying at the top and selling at the bottom.
■Past price fixation — this is the tendency to avoid prudent trading decisions by anchoring your thought process to prices that no longer exist. "I'll sell it if it gets back to $4." "I'll buy it if it gets down to $4 again." We are all guilty.
In trend-following trading, if the price goes up you don't sell you buy and if it goes down you don't buy you sell. The old high has gone. The old low has gone. Don't wait for them to come back to do the wrong thing.
It's not easy to be unemotional when trading but that's how we're all wired. To move from the losing majority to the winning minority we will all just have to unplug and reconfigure.
Marcus Padley is a stockbroker with Patersons Securities and the author of the daily sharemarket newsletter Marcus Today.
www.marcustoday.com.au

MRM still open

The MRM trade is still open and looking pretty good - prices moved past some significant resistance levels from back in October. However, I really don't worry about things like that. I know that every trade has about a 50% chance of being profitable. Notice also that the trailing stop is still only just above the actually entry price.

I have been mainly out of the market for about 18 months now due to other uses of my capital, and it is a bit frustrating to watch such a great bear market rally unfold. I have only just started to trade again with my small SMSF portfolio, but bigger things will have to wait for later in the year.

Constellation

This is my third weekly system, and last that I will describe.

Constellation was developed using Amibroker software in about 2004 . I would descibe it as a medium to long term trend following system. The basic underlying components of the system are -
1. Trades long only ASX stocks based on weekly charts.

2.Identifies bullish market conditions before entering any trade

3. The entry has three conditions - based on price , volume and volatility The conditions are surprisingly simple and not curve fitted.

4. The exit has three conditions - trailing volatility stop, momentum stop and market based exit.

I have attached some metrics of the system using Amiboker backtesting over the XAO index constituents for 2000-2008. Highlights are a win:loss ratio of over 4 and a winning % of > 50%.
This system has the same stop as Supernova. No allowance has been made for slippage. For very short term systems this can destroy results, but for this style of system it is not as critical.

Why Trade Part II ?

I was reading the Australian Financial Review last weekend and came across an article on the return of Bonds v Shares. What a shocker - turns the conventional wisdom almost totally on it's head of risk v return. There has been no payoff for taking excess risk in Shares if you are a managed fund or index investor.
I don't like the lack of control in these forms of investment and the above graph reinforces my beliefs.

Meteor

Compound Annual Return and Drawdown Monte Carlo Backtest Results

Returns per year vs Index(in brackets)

Trading system Statistic (backtest)

Meteor was developed using Amibroker software in about 2005 . I would descibe it as a medium to long term trend following system. The basic underlying components of the system are -

1. Trades long only ASX stocks based on weekly charts
2. Identifies bullish market conditions before entering any trade
3. The entry has three conditions - based on price , volume and volatility The conditions are surprisingly simple and not curve fitted.
4. The exit has two conditions - trailing volatility stop and momentum stop.
I have attached some metrics of the system using Amiboker backtesting over the XAO index constituents for 2000-2008. Highlights are a win:loss ratio of over 4 and a winning % of > 50%.

This system has a tighter stop than Supernova but will stay with the trade after it entered even if the market turns down.
No allowance has been made for slippage. For very short term systems this can destroy results, but for this style of system it is not as critical.

Chart Title setup

Amibroker is extremely powerful charting and back-testing software.

I have set up the Chart Title display to help in position sizing. I simply need to right click on the chart and select the parameters window to change the trade size.

Supernova

Compound Annual Return and Drawdown Monte Carlo Results (Backtest)

Returns per year vs Index (in brackets)

Trading System statistics (Backtest)

Supernova was developed using Amibroker software in about 2005. I would descibe it as a medium term trend following system. The basic underlying components of the systems are -

1. Trades long only ASX stocks based on weekly charts

2. Identifies bullish market conditions before entering any trade

3. The entry has three conditions - based on price , volume and volatility. The conditions are surprisngly simple and not curve fitted.

4. The exit has three conditions - trailing volatility stop, momentum stop and market condition stop.

I have attached some metrics of the system using Amiboker backtesting over the XAO index constituents for 2000-2008. Highlights are a win:loss ratio of over 4 and a winning % of > 50%.

It should be noted that the Aussie market has been through a once in a generation bull market and so returns during 2004-2007 will flatter most systems. A big strength of this system is that it will aggressively buy in bull markets or bear marker rallies , exit the market quickly if needed and sit idle in bear markets like 2007 -2009 and live to fight another day.

No allowance has been made for slippage. For very short term systems this can destroy results, but for this style of system it is not as critical.

MRM Trade

I will describe my systems a little more as the blog matures. However, this is my first live trade for the blog. As I mentioned these are weekly charts, so the signals are only acted on once per week - I am not interested in being glued to a screen and having to make ad hoc decisions every day. I simply follow my rules and let each trade take it's course.

PS Nothing discussed on this blog is to be construed as financial advice. DYOR.

The trade is still open.

Why Trade?

The performance of managed funds is abysmal over the last 5 years( or even 10, but I am only going to look at the last 5). From the Colonial First State website, I have found a representative sample of funds performance.

452 Capital Australian Shares 3.46%pa

Blackrock Australian Shares 7.01%pa

BT Core Australian Shares 6.07%pa

Can we easily beat these professionals? I ran two tests. Both randomly selected a portfolio of 20 shares. One simply held the portfolio for the whole 5 years. The other used some simple market timing to decide whether to be in the market or not. If we weren't invested in the market, excess funds were deemed to earn 4% cash interest.This filter is based on a simple 34 week moving average. I ran 100 monte carlo simulations of each and ran the results through an excel spreadsheet which was kindly given to me by another very successful trader ( who I won't name so he doesn't get flooded with requests) .

You can see that the first result gave about an average 1%pa. But if we added some dividends of maybe 3-4% we are getting very close to the performance of the managers.

The second result is much better with an average of about 12%pa. Because it was invested for only about 70% of the time, let's add just 1%pa for dividends. THIS IS TWICE THE PERFORMANCE OF THE FUNDS.

Before anyone mentions the tax effects of selling your portfolio a few times, it should be noted that the funds do this internally and you will always get a CGT bill at the end of the year(and you actually may have had a negative return for that year).

Note also, the draw down for the straight buy and hold system and the funds is atrocious - up to 50%

So, my goal is to better 13% pa - in fact my goal is 20% pa over any 3 year period. I wouldn't consider my self a success at this business if I couldn't value add at least a 50% better return than the most basic system I have just described.

Is 20% a lot for a trader? This depends on a myriad of factors - especially the size of your trading accounte and how much leverage you are using. During 2003 - 2007 this was very easy for my style of trading to achieve - maybe not so easy in the coming few years.

My first post ...............

The purpose of my blog is firstly to create a record of my trading history. I have spent many years and countless hours studying and researching the markets. I have viewed the industry from the perspective of a trustee of a public Superannuation Fund, sitting around a board room in suit and tie. I have geared 100% into the market using managed funds at the top of the market in 2000. I have tried separately managed futures accounts, options trading, trading newsletter recommendations, buy and hold newsletters , quant stock investing and managed day trading accounts on the US markets. There is virtually nothing I haven't tried.

Through all of this I have survived because I have focused on risk management.

What I have found to be extremely risky is buy and hold(hope) investing. How do you know the value of a company? Even if you think you know, how does the market value the company? I have found the answer to these questions in price charts. But for me it is not in 10min charts or daily charts - usually these are affected by noise. Weekly charts reflect the footprints of the investors and institutions and this is where I have found my edge. It hasn't been a fast journey though and has taken 8 years get to this point. I want to document my thoughts and results as I go forward from here.

I also want this blog to help me be accountable to myself. The absolute hardest part of trading is the psychological aspect. You have to learn to think in a way that is not intuitive to most investors by recognizing when you are wrong and immediately move to limit your losses. You need to have the conviction that your systems work, when it doesn't feel like they should. I believe this is the main reason why 90% of traders are not successful.

I am looking forward to creating a record of my trading journey from here....