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Hello Readers.

At my courses and lectures I am always banging on about keeping good records and then reviewing performance, not just the systems performance but your own personal performance. A very common mistake traders make is they do not test and measure. Employing a well tested method is one step, sticking to it another, but then there is the review of how IT and YOU have performed. The measuring part of the process. This is impossible without good records, so if you are not keeping good records of your trades I strongly recommend it.

Every profession has theory and practice. Developing and testing and even employing a method is all theoretical until you have some runs on the board to determine how well you are practicing. Arguably one of the most powerful tools you have is the collection of real results data to review your method and see where the strengths and weaknesses are, not just with the system but with your practice.  It has been 12 months since the live and real  Peters Portfolio has been running, so lets do some disecting of the method and operators performance.

Results are:

17% return since portfolio started early Nov. 2013

26% annualised return since portfolio funds fully employed (last 8 months)

Compared to

All Ords return last 12 months.  2% (5415 to 5522)

All Ords return last 8 months. 1.2% (5460 to 5522)

What I mean by annualised returns is calculating the last 8 months return from when the funds were fully in the market, and then averaging out the performance to get a yearly performance return. In fairness to the testing and method I used, the cash available wasn't "all in" at the start, taking some time to buy in. This was my personal choice because although there were plenty of stocks signalling a buy, I thought in reality that most traders being risk averse would slowly fill their portfolio, so I did the same, buying stocks for the portfolio over a 4 month period. Bear in mind the system has no psychological bias and would have bought fully in from the first day.

Looking at the graph below, the dark green represents how much cash is employed and you can see it wasnt "all in" until around late Feb, early March this year. 8 months ago.

Around 12K in capital profit plus 5K dividends gives the 17% for the 12 months or 26% annualised for 8 months.

What worked well.

While reading this part you may like to refer to the trades list in the portfolio, so click here if you wish to.

http://www.easysharetradingsystems.com.au/peters-portfolio.html 

Taking stops! nearly all the trades I sold are now lower then they were when I sold them, which of course is the whole idea of stops. Some rebounded after selling which is always frustrating, but over time most fell away to make new lows, confirming I had a good sell signal.

Position sizing was good, most stocks were stopped out within my nominated risk. There are always exceptions, some losses being a lot larger than others, but the important thing is that the averaged loss is tolerable and within the nominated risk profile.

The win rate of 50% was in line with the long term testing. I need to give a wrap for position sizing here that worked particularly well considering out of 20 initial buy signals (not including pyramiding) there were 10 winning trades and 10 losing trades, or a 50% win rate. This is lower than I hoped for and I will explain that in "what didnt work well". Good position sizing helps reduce losses and boosts profits, even if the win rate is 50% or even less.

Holding the winners has paid well. As I have said before that weekly trend trading works on the 80/20 rule. 20 to 30 % of your trades give you most of the profit, so you need to HOLD the trades that have not signalled a sell, (because you thought you knew better) because the one you sell could be the outstanding trender that makes 100% profit or more. And the one you dont sell that continues to fall turns out to be the one really damaging the years performance.

Focusing on low priced mid cap growth companies has paid off, with those ones being the dominant performers.

Pyramiding (adding more money to winning trades)  has paid handsome profits on the open trades I am holding. It remains to be seen if that performance continues, so far so good.

Taking the 52 week high buy signals. It is difficult at times to buy high, I recognise and acknowledge it, however the fact remains that often the best trades, the big winners, never give you a second chance to buy lower. Good position sizing takes a little fear out of buying the initial entry by knowing your expected risk of loss if things dont work out. 

Dividend paying stocks represented 5% of the portfolio result, contributing well to the overall profit. Also tax benefits are realised by holding stocks that pay a fully franked dividend.

Market filters indicating when to enter the market and when to back off appear to be working ok. No system is perfect, but trading becomes easier when you have clear rules of when to act or not, thus removing the subjective bias we all have about the market.

What did not work well

Me being an idiot and not doing enough due diligence on a couple of stocks that turned into big losers. Namely NEN and PBP. Those 2 trades cost me 4.5% of portfolio capital. Those 2 stocks did not meet my fundamental selection criteria but I got seduced (well ladies I am a Scorpio) by the chart patterns. As mentioned above this knocked around the win rate.  Another 4.5% on top of the existing results would have been impressive..........lesson learnt.

I got seduced (what again?) by some of the smaller miners making new 52 week highs, it was looking good for resources for a few months early in the system, thankfully I was disciplined to take the stops because as we now know they all fell away to make new lows. Some of these stocks again did not have good fundamentals, lesson doubly learnt.

Some of the pyramided positions turned into losers, although overall the method of adding to rising stocks is working ok particularly in this slow uptrending market. (pyramid systems can work well in slow or patchy markets) Pyramiding does assist the strategy of buying strength and selling weakness model, which is what trend trading and buying new highs is based on. Again as I have taught and said before, if employing a pyramiding method, position sizing IS PARAMOUNT. Don't pyramid if you dont completely understand the method or the consequences, and what the objective is, you can always keep it simple by just having single position trades.

I got seduced (there is definitely something wrong here) by a brokers report on NST and pyramided FAR TOO LATE. I just cant believe I did this. After 20 years of trading (and nearly 2 years in a Buddhist centre) one would think I could resist greed, aha! it seems at times my humaness remains to dominate after all. It's all my mothers fault for birthing me in November. That mistake cost me another 0.7% of the portfolio.

Those mistakes mentioned above adds up to 5.2 %. That would have made a difference to the bottom line if added to the profit column. Annualised gain would be well over 30% as well as improving the win rate. Also, consider this. How much better could the result have been if the money that was employed in those losing trades had been in winning trades? That leads me to....

Focus on controlling losses.

You hear it and read it in many trading books, and if you have attended trading lectures from coaches and market professionals you would have heard the same. Focus on limiting losses and the wins look after themselves. (providing of course you hold winning trades until they are stopped). The idea of trading is to keep your money employed in the best place for the majority of time. When you control losses that money is free to move to a more productive home. Extensive testing and trading clearly shows that sitting in cash all the time or holding falling shares is not the way to employ your money to be at its most productive. Losing stocks should be sold and cash at hand can be remployed ASAP to benefit from opportunities that always exist somewhere in the market. This methodology is backed by the above results. The system produced the results it has with the XAO making 2% in the same time. I acknowledge it is a small sample data and things can change at any time, but its encouraging the results are in line with the long term testing.

Psychology

Have you noticed in this review I have not focused on being "right" or "wrong" ? I hope you have because trading is not about being right or wrong, but trading the probabilities, taking signals to buy and sell, position sizing risk, and having some trust in your self that you can trade successfully. As traders and investors we operate in an uncertain environment. Dedicating enormous amounts of mental energy into attaining certainty is an exercise in futility, as not even the most seasoned trader knows the future or the outcome.

What does help enormously is knowing the probabilities of YOUR method, developing an appropiate mindset and having support from other traders, groups, clubs and/or trading education.

The next 4 months

As you can see from the equity graph the system is back in the market, cash fully employed. It will be interesting to see how the method goes after a full 12 months real live data. I am looking forward to the result (with no expectations or predicting) and will write another review then. As a little sidenote analogy, I used to play a lot of competition golf, nothing outstanding, a club B grader with a 16 handicap. One thing I learnt was that we played 18 holes, no more, no less. A lot of players would get to the 13 hole and give up after a lacklustre start, but a lot can happen in the 6 remaining holes. Winners can lose, losers can win. After 8 months I am now lining up on the 13th tee, its one shot at a time from here on, as it was from the start. The first trade in this system discussed today (NEN) was a 75% loser...............

That's it for this time. Drop me an email or ring (0403821523) for any enquiries.

 Peter Castle

 A big part of managing a golf course is managing your swing on the course. A lot of guys and go out and hit a golf ball but they have no idea of how to manage what they do. I have won as many golf tournaments hitting the ball badly as I have playing well!

Jack Nicholas

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