Tuesday, 28 October 2008

Equity Curve

I have been looking through my old trades for the last few days. This is the equity curve of a "long-only" $50,000 margin account which i managed for a good friend since Dec 2002. I almost doubled the capital over this period and the return is around 18% per annum if i average it out. The return is nothing spectacular if you consider the bull run which we went through from 2005-2007 but i guess it became "spectacular" if you include the current 10 months in 2008. I have not been trading actively in this account since November last year as it is difficult to trade a 'long-only' account in a downtrending market.

These trades revealed some interesting points which i would like to share with you:

1. Most of the trades in this account are swing trades that last for only a few days to weeks.

2. There are not many trades during June and Dec where i usually take my holidays. :P

3. There were extensive periods of time which i didnt trade. For example when i am either busy with work or travelling overseas.

4. Some stocks you just have no luck. Every trade i make in that stock lost money. :(

5. You can see that i was breaking even in the initial 10 months of trading that account. (Prior to Dec 02, i have been making losses in my own account when i started trading actively from 2001).

6. Drawdown in the equity curve is inevitable. My equity curve is not a straight line upwards. I have to pay refresher course to Mr. Market every now and then. But the trick is not to let any drawdown wipe you out completely.

7. Trading is a marathon, not a sprint. I have many friends who made a lot of money during the bull run from 2006-2007 but gave everything back (with interest) within a short span of 10 months in 2008. I think the first 10 months of 2008 is the defining moment on what kind of trader you are. Everyone is a genius during the bull run.

My trading journey can be summarised in this manner:

June 2001 to Dec 2002. 18 months of constant losses and learning more about myself each day. Most trades lost money as i trade on rumours and news. After much losses, I spent a lot of time reading up books on trading and investing. I learn something new about myself each day, what kind of character i have and what kind of rules i should adopt in trading the market. As mentioned to you before, "Trading for a Living" was one of the few books which helped me in my trading journey. I will share some of the other books that helped me another time.

Dec 2002 to Sep 2003. 9 months of breaking even. Equity curve fluctuate up and down as i had some initial success only to see drawdowns due to lack of discipline in money management. Many profitable trades are wiped out by a few losing trades.

Oct 2003 onwards. I finally start making consistent profits. I start to use the same indicators which i am comfortable with. I have certain trading set ups which i like and have enjoyed some success. Money management is in place and i can cut loss without feeling anything. I will actually feel worse when i know i should cut loss but didnt.

My friend thanked me for "not trading" her account actively for the last 10 months. She was also thankful that i advised her against buying the property she was eyeing early this year. You can say that she is now my "die-hard" fan but she is the only account that i will manage for others now as she has stood by me during my initial difficult years. I have recently decided to help her manage her $80,000 CFD account. Let's see what kind of performance i can deliver now that i can behave like a 'hedge fund manager' and can trade both up and down direction. I will keep you updated again but hopefully you can draw some inspiration from this posting and find a path that suits you most.

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