BarroMetrics Views: Behavioural Changes
Yesterday, Bob Mitchell wrote: “Would you be willing to share your top 2-3 takeaways from your self assessment and what specific changes in actions/behaviour you took?”
Sure Bob, but I am not sure how much help they will be. Anyway……
There is context to the steps I took.
I saw that the sub-prime crisis and QE changed intermarket relationships and reduced diversification. For example, in 2011, at the stage of the business cycle the US was in, I expected to see these relationships:
- S&P up, interest rates down;
- USD up, S&P up etc,
But, after QE these relationships reversed.
As far as diversification was concerned, we were seeing much closer direct or indirect correlations with the S&P than historically had been the case.
Following a drawdown (17%), I decided to…..
…… to reduce position size until I saw some of the ‘new’ relationships break down.
Late 2012, we started to see this, first with Gold, then the European crosses, the AUDUSD and finally now, the 30-year Bonds.
While I was waiting for the context to revert, I was working on my plan….and so turning to specific behavioural changes…..
1) I stopped trading the S&P, the instrument I felt was most impacted by QE.
2) Then I had to change the way I viewed timeframes…..
My original plan called for specific functions for different timeframes (see Nature of Trends). The traders timeframe, I selected, and once I did that, the rest fell into place.
Until 2010, the plan did very well. But after 2010, I had found that the approach did not work as well as it had in the QE environment.
Eventually, I came up with the concept of controlling timeframe. It started as a ‘gut feel’ that a timeframe, say the 3-day swing, was the important one; then I noticed the feeling would change to another timeframe.
When I started to pay attention to the ‘feelings’, I saw an improvement in my results. I then proceeded to conceptualize the idea.
Nowadays, the controlling timeframe is an important one for me because it allows to define whether we are likely to be in a ‘chop’ or ‘directional’ environment. I then adopt a strategy suited to the environment.
3) The final change was to change the way:
- I view entries and
- The way I exit trades.
I am now looking to enter a trade at the start of what I call the Initial Price Movement. In Pete Steidlmayer’s terms ‘the beginning of a distribution’.
Since an IPM has specific characteristics, once a suspected IPM is underway, I can exit a position should those characteristics not be evident.
The upside is my losses are relatively small – many trades are scratched. This results in a massive difference in the avg$win compared to the avg$loss: whereas my average loss used to be 1.83% to 2.2% per trade, it is now down to 0.32%. It would be lower but for four mistakes.
There are a number of downsides:
- More trades. (Downside because I am basically a lazy trader – looking for more return, less trading effort).
- I have to be prepared to re-enter a trade in the same direction sometimes at a less attractive entry price (found this to be my greatest initial challenge).
- There is less room for my bruised ego to hide. If I make a mistake i.e. enter and/or exit against the method, the resultant loss stands out like a beacon.
Hope this helps. All the best