It is time for my 3-month review. The last three months happily cover just the time that my process has existed in its present iteration. I will go over the figures and then look at the lessons I take from the period.

  • My success rate was 48%. Profit taken was c. 2.5%, which is consistent with my 10% first-year annual objective (note that this will be different from my performance numbers, which are based on equity, not realised profits).
  • I twice broke my trading rules after I had entered a trade, taking profit too early, and this cost me a significant amount of return. If I had followed my rules and taken profit at the first opportunity, the return would have been 3.7%.
  • In November I doubled my risk-per-trade. I have adjusted October’s returns to simulate three months of trading at the new risk level. This gives a return of 4% with rules broken, and 5.2% with rules being followed.

These figures are surprisingly reassuring. Even without adjustment, returns are running at a reasonable, though not wildly exciting, annualised return of 10.4% (the sample is too small to say I am on course to do that in the normal run of things, but it is better than being negative). With adjustment they look much better. This tells me that, so far as one can tell from three months’ data, my current process is working well, provided that I stick to my trading rules.

There were three distinct episodes that had a large effect on trading profits:

  • In October I was long EUR/GBP, AUD/USD and gold. All three had a pullback, and I took profits rather than stick with the positions. This was a mistake. I sold almost exactly at the bottom of the pullback. I think that, except in exceptional circumstances, I should not exit positions into weakness, only into strength.
  • In November, a surprisingly high Chinese inflation number and the expectation of tightening measures — overblown in my view at the time — led to a highly-correlated sell-off in my positions. I was stopped out of longs in gold, AUD/USD, EUR/USD, soybeans and sugar, and lost money trying to buy the pullback in the S&P 500. The markets subsequently recovered.
    • One clear lesson from this episode is that jumping out of trades early, taking a small profit, has a cost — I had exited soybeans in fear, and exited AUD/USD, gold and the EUR on a pullback as described above. Had I still been in those trades, I would have been sitting on good paper profits and had the strength to ride out this reversal.
    • Less clear is what lesson to draw from the correlation. I knew these trades were somewhat correlated, but various markets suddenly focused on the Chinese tightening story, and I don’t think that is the kind of thing one can consistently see coming. But since the episode I have been more cautious about correlated trades. To some extent it doesn’t matter how much exposure to a single risk factor one is prepared to have — if you accept more exposure, you make more on the way up and lose more on the way down, and it all evens out in the end — but the key thing is that you have to be consistent: you can’t have lots of exposure when trades go against you, cut back, and then make less when the market goes back in your favour. I think I will work to a maximum of two highly-correlated trades at any one time.
  • In December, a risk rally gave me winners in sugar and palladium. I was too cautious about adding more risk because of my fear of correlation — I didn’t trade silver, for example, because I was already in palladium — and therefore missed out on some potential return. I also missed a trade in soybeans, but the breakout was the day before the Christmas Eve US holiday and I am still in two minds about whether I was right to be cautious about that. Given my experience of the quiet markets in August, I think I probably was.