Pedma's Portfolio Management Journal - 7/31/2024
Portfolio management, market scans, and more
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“Just lost all of my portfolio.”
That is the headline of a trading forum post I just read.
This is the reality of most traders.
It’s a cycle. From winning , to losing, to blowing up. And back again.
I was also on that cycle once, when I was trading equities.
The only thing that changed the course of my trading, was making it systematic.
I’ve never changed ever since.
Does that mean that I never have losing periods?
Of course not!! (as you’ll see by the end of today’s article)
I am a real trader and that means that I will actually have drawdowns.
Only the fake traders (most of online traders), never show you their losing periods.
And that’s one of the goals of today’s post.
I want to show you that no matter how good you are, you will still go through drawdowns.
The obsessive attempt to avoid losing periods, is what will make sure that you blow up your account.
You will go from system to system, never knowing why this one is worst than the previous one.
Think about a restaurant, a hotel, a fishing business.
Do they make money every month of the year?
No!
Why?
They are seasonal businesses, and they know that.
When they go through bad periods, they probably lose money, but they keep going at it.
They know that eventually, their time will come.
The same with trading.
Markets will ebb and flow out of sync with your models all the time.
It doesn’t mean that your models are broken.
(if you did the appropriate work of course…)
It just means that the market is out of sync with your edge.
Let’s get into today’s article, my performance will be at the end!
Index
Introduction
Index
Crypto Market Report
Personal Portfolio Performance
Crypto Market Report
It’s been close to 5 months since the top of the crypto market back in March.
It’s been a tough 5 months for any trend follower or momentum trader.
During the previous few months, the market was really in easy mode.
Many new momentum traders were born during that time. I don’t see many of them anymore.
This happens every cycle.
I see it all the time.
People come and go. Like the tides of the sea.
It’s during these times that you’re really tested. It’s during these times that your models are tested.
Easy times are… easy.
It’s the hard times where you figure out your flaws.
You have 2 choices:
You either quit and start trying new models, eventually blowing up
You stick to a proven process and allow the law of large numbers to play out.
Now, there’s nuances to those ideas.
You don’t want to be blindly stubborn to a system, that has stopped performing.
But to interfere with a model, the lack of performance can’t be caused by the market. It needs to be caused by the effect that you’re exposed to, no longer being present.
A fundamental shift about market behavior that invalidates your models.
I don’t expect things getting better, heading deep into the summer.
August and September tend to be weaker months, and the same phenomenon is observed in traditional markets.
There’s a reason for the famous saying:
Sell in May and go away.
I don’t like to use small samples, as seasonality data usually is, but this effect has some fundamental basis for it.
In summer months, people are not as active and not as willing to take on risk.
They are mostly on vacations and liquidity dries up.
In terms of deviation from average behavior, in the short-term it’s hitting that zone of -2 standard deviations.
But in the longer-timeframe windows, we can see that it is pretty average behavior.
So nothing extreme there that would tell me that the markets might be due for a reversal.
In early July for example, we had a significant deviations from average behavior, which signaled a possible buy, as the market extended to the downside.
You can see the buy signals on the horizontal green lines.
Even though we haven’t had a very strong positive momentum period, we are still 24 days in a positive momentum period.
When I am really confident about a bet on the long side, I like to see all the “stars” lining up:
Long-term uptrend
Short-term environment extremely weak
Burst in negative momentum
Abnormal amount of time in a negative momentum environment
And then the odds start to tilt towards the favor of new longs.
Even though this kind of analysis doesn’t directly impact how I trade, I do see it’s value when my models are placing new orders.
We need to pay attention when everyone loses interest, and start to be careful when the whole world is allocated.
It’s always been the nature of markets, and will always be.
Personal Portfolio Performance
The portfolio performance (red line) remains quite stable, but it’s going through a drawdown. The drawdown is expected and justified with the current market environment. I am mostly exposed to the long side in this model and it’s normal that it gets impacted during negative performances in the market. To me, this is normal, I’ve been through many drawdowns and will be through many more. But to most people it isn’t.
A lot of people struggle with drawdowns because of uncertainty. They don’t know if whatever edge they had in the past, will ever return. And that is a real concern. You never truly know for sure.
Ask yourself this question. If you knew that in 5 years you’d be richer if you invested in a model, why wouldn’t everyone do it? Why would everyone be working a job they hate, for low salaries, when they could just get a loan for everything they had and repay it 5 years later?
If that was true, the edge itself would be negated, because there wouldn’t be anyone on the other side of that trade to take it.
You are paid to take risk.
Get rewarded for what you get paid for. Be proud of it. You are going through a drawdown? Understand that is the ticket to enjoy the ride that many people won’t ever be able to.
Is it hard?
Of course!! If it wasn’t everyone would do it. Be proud to be in a profession that requires real courage to be in. Build that discipline to enjoy the suck. Understand that in a few years, you have very good odds of making it to the other side. Of course if your model is built using strong fundamentals.
And that is why…
To help you really speed up your learning curve, I’ve decided to open a few spots to one-on-one coaching, to share my knowledge and passion for trading, with you. I’ll show you exactly how you can go from unprofitable, to profitable trading, as I did.
If you’re an individual or enterprise, feel free to book a call:
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