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The Post Where I Tell You, “I suck . . . “

It’s the end of the year and that always gives rise to reflection.  In life we usually look back and look forward.  Personally, I like to know where I’ve been.  What I’ve done right and, of course, where I’ve stumbled.  I look forward because I don’t like to wander blindly and hope for the best.  It’s just not my style.

I like to have a plan.  My hope with any plan is that it will lead to some end goal that I “want,” but I can’t control the end or the outcome.  I can only control the plan and what I do now, today.  Interestingly, I think it’s good to make mistakes because it helps us to understand what doesn’t work.

calendarIn reviewing my trading activity for the past year, I can see where things went right and where they went wrong.  If I measure things purely based on returns, it’s clear that the Donchian Channel system and the ETF Rotation System have done well.  It’s also clear that my options trading has added very little value to my overall returns.  Additionally, the options trading consumed significantly more mental space and time than the Donchian and Rotation Systems combined.  Specifically, I know that the Donchian channel and ETF Rotation systems require about 2 minutes of work a day.  When I trade options, I spend much more time following the market during the day and worrying about price.  I know that I don’t need to do that, but it still seems to happen.  Sometimes the hardest part of trading and investing is figuring out how to get past ourselves.

Without going into some cliche 80/20 rant about effort and returns, let’s just say that my time has been more productively spent developing and trading outright trend following systems.  By outright, I mean systems that buy or sell a market and generally risk a small amount per trade to make several times that amount.  Despite a large number of losers, I have had better returns using 1:4 risk:reward systems than 1:1 risk:reward systems.  I know I’m not the first one to find more success with Trend Following systems and I definitely won’t be the last.

Does that mean that trading options doesn’t “work?”  Absolutely not.  What this means is that I don’t think I’m a great options trader.  Additionally, I think that developing outright trend following systems has been significantly more profitable for me over time.  Do you know why I say that?  Because I can prove it and that’s why I always track my trades.  Seriously, who doesn’t want to look back and prove they suck at something?  Most people won’t tell you that they think they suck at something, especially in a public manner.  I suppose I won’t say that I “suck” at trading options, but I don’t feel like that’s where my strength lies.  See that?  That’s me softening the reality of sucking.

My belief is that I have an obligation to be honest about everything I do and sometimes that includes admitting when I don’t feel like I’m great at something.  In this case, I feel like I can be successful at options trading, but it’s going to require a significant amount of time and energy.  I feel like I’m okay at options trading, but not exceptional.  Like everything in trading, investing, and life, it isn’t easy . . . nor should it be.

Now that we’re through the self deprecating part of the discussion, we need to look forward.  Understanding what’s going right and what’s going wrong naturally leaves me (and probably you) wondering where we go next.  When something doesn’t seem to be working out, it makes sense to identify what is working and refocus efforts on the things that work.  In other words, we need to find and develop our strengths.  As that relates to our discussion here, I’ll be shifting more of my focus to developing and trading outright Trend Following systems.

Going into 2015 I’ll continue to trade ETF Rotation Systems and write the Market Momentum Newsletter.  Additionally, I’ll be trading the Donchian Channel System on a few Forex pairs.  As always, I have new systems that I’m researching and will provide information on those as we go.  In other related endeavors, I have a trend following system that is starting the incubation phase at Covestor.  Additionally, I am going to be contributing to See It Market, which is a really great site with good people behind it.  Check them out if you haven’t already.

I’m looking forward to 2015.  It’s always great to hear from readers so please let me know what you think.

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  • Rich Durham

    ETF Rotation schemes (3 to 6 month lookbacks) seem to do a good job of getting you out of the market when equity values fall (TLT vs SPY for example), but don’t get you back into equities fast enough. Consider a rule that prevents you from having more than 1/3 of your portfolio in bond or inverse ETFs during a downturn (not focused on major market meltdowns) so that you have some portion of your portfolio in cash to purchase long equities in a rebound.

    • That’s an interesting idea Rich. Recently I was looking at the average return of SPY both above and below the 200 day SMA. I was surprised to find that, on average, there isn’t as much difference as you might expect. What that means is that there are both large positive and negative percentage returns when SPY is trading below the SMA. What you’re saying about getting in early is similar to finding those large percentage days below the SMA. Thanks for the comment.

  • kUser

    Good luck with your investigations!