A Year of Trading: Lessons Learned + Portfolio Performance Update: Year 2, Month 1, 2

 

Awhole year has passed since I started my portfolio, more precisely a year and 2 months. This is a post I was planning to write a long time ago but I simply didn’t find the time for it until now. I had a couple of changes in my life’s schedule including adding another extra job to my already full time job. I was forced to rethink my posting schedule. Last year I wrote 1 long post a month and a couple of short ones from time to time, now I will write shorter posts that get straight to the point. I will do the same with my predictions and trade analysis posts. I could write a whole book about the lessons learned during a years worth of trading but I simply don’t have the time for it so I will try to write only the meat, the most important things that I have learned and that my readers can also benefit from.

The things I’ve learned have nothing to do with technical analysis, it’s all psychology. Anybody can draw trend lines, find support, resistance and spot a head and shoulders pattern. Execution and managing a portfolio successfully with consistence through time is an entirely different animal which requires more than just pattern recognition skills, it requires successfully managing your emotions which more often than not get in the way of the successful implementation of your trading strategy.

I started the portfolio with 100,000$ and after exactly 1 year it grew to 132,000$, but that’s not the whole story. At one point my portfolio was at 280,000$ and then I gave most of the profits back and ended the year at 132,000$.

If you look at the performance you can see that my portfolio had pretty wild swings during the year:

Month by Month

Month201520162017201820192020
Year32.07%-----
January5.52%-12.96%----
February31.53%29.23%----
March4.61%52.22%----
April12.86%19.07%----
May23.38%15.69%----
June-11.76%3.11%----
July-15.46%-36.63%----
August22.11%-6.55%----
September9.14%-8.88%----
October18.78%6.26%----
November-28.71%-----
December-22.40%-----
Worst D.D.-55.36%-----
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS

 

And here are the last 2 months:

Portfolio Performance: Year 2, Month 1

 December 21, 2015January 22, 2016 
Time Weighted Rate of Return-12.96%
 TotalTotalChange
   Total132,003.32114,898.84-17,104.47
Net Asset Value Change: December 21, 2015 - January 22, 2016

 

Portfolio Performance: Year 2, Month 2

 January 22, 2016February 22, 2016 
Time Weighted Rate of Return29.23%
 TotalTotalChange
   Total114,898.84148,488.6733,589.83
Net Asset Value Change: January 22, 2016 - February 22, 2016

 

So why was my portfolio so volatile? What did I learn to improve my risk adjusted performance? The most important lesson I have learned can be summarized in the following way:

Don’t have any expectations. There is no past, no future, there’s only the trade you are placing at the moment. You choose the trade according to your strategy, you place it and if it is profitable you exit at the target and if it goes against you, you exit at a predetermined stop level. That’s it, everything else is out of your control and therefore you must be detached from the outcome.

Whenever I trade in this state my performance is excellent and when I think about past mistakes and try to correct them, my performance is always abysmal. The trick is to be in this detached, in-the-moment state as much as possible. When you first start you are careful, you place your trades only when opportunity presents itself, you respect your stops because you just started and you don’t want to lose your initial capital. You do that for a while and then you start to get successful. You put a few good trades, they go in your favor and then you’re up 30%, 50%, 100% in a very short time. Then you start thinking you have the market’s number and you’re on a roll so your selection criteria becomes more lax and you start making mistakes. You then try to correct them and keep making new ones and you get in this vicious spiral and before you know it you lose a large percentage of your gains. When you’ve lost much more than you expected and have lost all hope of getting it back, you lose all your fear too and only then at that point you finally get it. You no longer care about past mistakes or lost profit opportunities and right at that moment without trying you get in that detached state where you don’t care about what happens next and then you start to trade the way it should be done and your performance improves radically. You cannot get to this state by reading a book, you have to experience it for yourself!

When I started this blog at first I didn’t tell a lot of people about it because I didn’t know if I would be successful or not. Then, after a couple of months when I had +100% returns I started letting more people know about it and right then my returns started getting negative, big time. You then enter that vicious cycle where you care about people’s opinions and you lose all objectivity and instead of correcting mistakes you keep making more and more. Your performance keeps getting worse and worse and you feel horrible, just when you told a lot of people about your “stellar record” you mess it up and you feel you have disappointed them. You once again arrive at that point when you mess up so bad that you can’t mess up even more and then you just don’t care about it anymore and ironically, right at that point, your performance becomes top level again. I am at that point right now. I started with 100,000$, doubled my money, reached a peak of 280,000$, gave most of it back and finished the year at 132,000$. In the next 2 months I fell even further to a bottom of 75,000$ and now I am back at 145,000$. After all of this I sincerely don’t care about what happens next. I am in this state now and the only thing left is to continue trading, accept and be grateful for whatever the market gives you and everything else will take care of itself. I’ll keep updating the blog and continue to track my performance.

Some other more general lessons I have learned are those classic ones you hear all the time like Buffett’s: “Be greedy when everyone else is fearful and be fearful when everyone else is greedy”. Also very important, don’t pay attention to the news, in fact pay attention to them in the opposite way. For example when you read news such as oil will stay between 20$ and 40$ for the next decade, if you’re long oil, that news must be music to your ears! Make your own opinion and don’t listen to others. And the most important thing: Believe you can do it! It’s all about belief, if you believe you will succeed, you will succeed and if you believe you will fail, you will fail. It’s like in the Matrix when Neo does the first attempt at a jump between 2 buildings when Morpheus says: “You have to let it all go Neo, fear, doubt and disbelief, free your mind.” Trading is a tough business but if you have an overarching belief above all others that you will succeed that will help you through the tough times, and if underneath it all you believe that you will fail then you will fail. You won’t jump between 2 buildings but you will fall flat on your face on the ground.

 

The other important thing which I already talked about is to let go of your past mistakes, to forgive yourself and to have a clear mind not burdened with trying to fix them. You should be approaching every trading day with a clean slate, like it is your first. Obsessively trying to fix my past mistakes rather then admit I was wrong and move on is one of the main reasons my portfolio was so volatile. I took on far too much risk and trades I should have never taken. My mind was so burdened with trying to fix mistakes and compensate for lost opportunities that it clouded my judgment and removed all objectivity in my trading decisions. That led me to making new ones and once again you enter that vicious cycle. You have to break that cycle, forgive yourself and move on. To make another movie analogy it’s like in Indiana Jones and the Last Crusade when Indy hangs from a precipice with his father holding onto him with one hand and with the other he tries to grab the Holy Grail. If he tries to reach it he will fall to certain death but Sean Connery, his father says to him: “Indiana…, Indiana…, let it go. ” You have to let go of your mistakes and move on, both in trading and in life in general. That was my biggest problem and I hope I finally let go of it because I made the mistake of trying to grab the grail far too many times.

 

Those are the most important things that I wanted to share. They may or may not resonate with you but if you have similar challenges I would love to know what they are and have you overcome them. Feel free to share your experiences or if you have comments, post them in the comments section.