I have just sent this to a friend and thought I would post it here as well:

I just wanted to let you know how I have been getting on since I last saw you. I have been losing money but am moving closer to making it — my latest analysis of my trades suggests that I am picking good trades, but screwing them up by 1. placing stops too close and 2. not taking profits. I have decided to make stop positioning largely automatic and profit taking completely automatic.

Having decided to do that, I made some indicators that showed the performance of a daily breakout strategy for a rolling 12-month period with stops placed either 1 average true range or 2 average true ranges from the entry point. These are superior to my previous breakout success indicators because they are based on what will now be my real stop and profit target positions (previously I had more discretion so breakout success metrics could only be an approximation to what I would have done had I traded every signal).

Then I experimented with combining these indicators with trading strategies. If the indicator shows that upside breakouts are working at the moment, the strategy trades them; if not, it doesn’t. These kinds of strategies seem to work very well across a number of markets over a 10-year period. The best profit factor is 1.99, on the S&P 500 (which doesn’t seem bad, considering that the strategy is pretty much a priori — I haven’t data-mined any of the inputs). 

All in all, a good strategy seems to be trading breakouts, but only when the time is right. I am spending some energy understanding when the time is right.

As you can see, I have decided to make profit-taking completely automatic. I am very bad at taking profits so it is probably best if it is taken out of my hands.

Here is a screenshot of the latest iteration of Market Personality. The charts are as follows:

Top-left: 12-month success rate long (green) and short (red) of trading 20-day breakouts with a stop loss at 1xAverage true range (ATR) and profit target at 2 ATR.

Bottom-left: As top-left, but with stop loss at 2 ATR and profit target at 4 ATR.

Top-middle: As top-left, but waits 2 days after a signal to enter a trade (a proxy for waiting for a re-test of the breakout level).

Bottom-middle: As bottom-left, but waits 2 days to enter.

Dotted red and green lines show cumulative success rates over 10 years.

Top-right: 2-day momentum.

Bottom-right: Volatility (average true range as a percentage of current price).