In the past 4 months I was testing certain modifications to the strategies I use. Considering that I didn’t actually add any new strategies – I just modified the existing ones – I didn’t do it on a minimum number of shares, opting to trade at the same level I would normally use. I also tried to implement another change, which was an attempt to increase the cumulative size of positions I open.
What are my conclusions after trying those things out and what am I planning for 2016? You can learn that from the article below.
Why do I need changes in my trading strategies?
Let me start with a bit of explanation. I’ve been using the same strategies for years now, only modifying them slightly depending on the market sentiment, but I decided to introduce some significant changes to my trading. The modifications are based around limiting the number of strategies I play and changing the size of the positions I open.
Why?
First of all – I would like to drastically limit the number of companies I trade and positions I enter in general, which should result in greater effectiveness of the opened positions. My aim is simple, I want to generate more profit from an individual transaction. This is why I want to have less trades but with a higher potential for movement.
Second – related to the first, I want to move away from scalping strategies which allowed me to generate around 1-3 cents of movement, but cost a lot of effort and time. I’m not saying I’m dropping them completely, but I’m putting them on the back burner until the market stabilizes a bit more or applicable sessions pop up.
Third – I want to overcome my fear that is limiting the size of the positions I trade. I think that I started to succeed in this regard. In the last months of testing, I didn’t have any trouble opening positions that were cumulatively a couple of times larger than the once I used to trade. It was really important for me. What’s the point of modifying anything if it doesn’t increase the effectiveness.
These appear to be 3 simple changes that should nevertheless have some positive effects. I really hope so. I base this hope on the last 3-4 months of trading. In this time, my results weren’t higher than my average, but I didn’t expect them to. My objective is different and according to my plan it will take a while to reach, but I’ll write more about that in another post sometime in the future.
Why am I sharing this?
Because I would like to draw your attention to one very important thing. Look at how much effort it takes a trader with some experience like myself to try out new strategies. Well, not new completely, but modified. Modified enough to make me spend a considerable amount of time on sifting through a lot of the “junk” I need to avoid because its effectiveness is too low. Junk that takes up precious time and doesn’t bring enough profit in return.
Increased turnover during the introduction of the modifications
In this period of testing my turnover has increased considerably. It’s not surprising. I used to open a position at 1-5k shares, after the changes that number jumped 3-5 times. I finally overcame this thing in my head that stopped me from using larger sizes than the ones I got accustomed to over the years. You’d think that it’s easy, but boy was it a challenge:) It’s a matter of getting used to a certain level of risk that I felt confident with. I’ve built my comfort zone based on this feeling and it felt good inside it.
But there is another side to the testing process. My fees per 1000 shares increased. They went up because in the testing phase I sometimes closed positions removing market liquidity. I normally try to exit a position adding liquidity, but when I’m testing certain changes, I frequently need to react quickly and close at or above/below the current market.
I wanted to stress one thing, normally when I test completely new strategies, I do it using the minimal size – 100 shares. This time it was different. I normally try to limit the risk as much as possible when I’m testing (I always use real accounts) and only after the results are satisfying, I trade the standard sizes. This time, I was modifying something that I traded for years, so I didn’t feel the need to test it with a smaller size.
Increase in fees in the testing phase
In the period of time I spent testing my changes, the generated fees went up significantly. I have to admit, it had a pretty big impact on the gross profit generated in that time.
The average fees per 1000 shares in the testing period equaled: 2.37$
In a similar period of normal trading the fees for 1000 shares were: 1.9$
My average between January and August: 1.93$
Average for the entire 2015: 2.08$ (the red dotted line on the chart).
As you can see the fees grew by nearly 23%. What’s important, I had a lot of transactions in that time that didn’t generate any profits or losses. I closed them at the market price, so all they did was generate fees.
Chart showcasing the effect the fees had on monthly results
The below chart is a visual representation of the above. I want to give you a good idea on how the fees influenced the results. The generated fees have increased significantly in the testing period. On average, the fees generated comprised 50.75% of the profit in the first 8 months. On average, the fees generated comprised 81% of the profit in the testing period (excluding October).
The average for the entire year: 57%
In the testing period, the fees comprised nearly 70% up to 85% of the generated profit. That’s a lot. More than I expected. But every cloud has a silver lining.
A small note about October. I went on vacation in October and so I’ve also taken some time off from the testing. I knew I won’t be able to trade for the entire month so I focused on what I knew works best.
A couple of conclusions
This analysis made it apparent how much money I spend on fees. Fees that I really can try to avoid. I rarely focus on the fees, when I’m trading and generating good results. I think of them as a normal cost that I have to bare, but this time I really started thinking about them hard. If in a year’s span the fees generated comprised 50% of the gross profit then I’m sure that I can lower that to 20-30%. It’s enough if I start closing positions adding liquidity to the market and that’s one of my resolutions for the next year.
And once I had a look back at my previous years, the fees generated comprised 10-25% of the profit, so it seems that I spent too much time scalping this year. Which is directly related to that second conclusion – less scalping, but that was the aim of my modifications anyway: focus on increasing the effectiveness of individual transactions.
Wish me luck 🙂
It was really hard to get myself to start analyzing my trading and then introducing some changes. They don’t seem to be huge, but are still a departure from how I used to operate in the past fews years. Why change something if it works, right? But I believe sometimes you just have to, even if the profits are acceptable. Trading just didn’t feel satisfying to me anymore, there was too much routine that would burn anyone out no matter what they did in life. I myself started feeling burned out and bored in August, but then the market became a lot more active. Once it was back to normal (there was no market crash, as everyone and their uncle had predicted :)) it was time to get my butt in gear and face some new challenges.
It feels like I’m starting a new chapter in my trading – I’m excited, I have new objectives and expectations, this is what I love about trading! 🙂
In a couple of months I will post some comparison charts and I’ll try to give you the details on how the effectiveness of individual transactions has changed.
Do you have any New Year’s trading resolutions? Share them in the comments section below.
