Trading System Psychology During Runups and Drawdowns


I want to go over the equity curves, drawdowns, and trading psychology for trading systems portfolios. And today, there were massive gains in the Stock Index Portfolio of approaching 30K per E-mini. I was waiting for a 15K drawdown. The drawdown level never hit 15k and so we did not start on this drawdown cycle.


I want to talk about trading psychology related to automated trading systems and specifically runups and drawdowns in the equity curve. We missed a run up at the end of July, not in this portfolio, but in a similar portfolio. The equity curve was near a worse case drawdown, and then it went into a run up of about $65,000 per E-mini. We missed that move. I was going through Covid during the drawdown, became risk averse and chose not to trade. We adjusted to the current portfolio for August and were waiting for another drawdown. As of yesterday, August 2, 2022, the drawdown hit 13k. I posted the drawdown alert last night and said I would wait intraday for at least another 2K.


When it comes to the trading psychology, for me, it is worse to start on a shallow drawdown, and then get slammed right into a worse case drawdown after missing the previous runup than it is to miss this runup today.


It is still very frustrating to miss another run up. I would have been more frustrated had we started on a drawdown that was too shallow and then get slammed for a worse case drawdown. So missing the run up and then getting slammed for a worse case drawdown is very hard and we avoided that but it's difficult to miss this big run up once again. So we missed the end of July run up, had a two day draw down and then another runup today. That's the psychology part of it for me. I find that if I trade outside of my psychology then there is no peace in your trading life.


We also discuss winning percentage. We don't normally have five days in a row where there is a 75% win rate (9 of last 12 days were winners). We had low winning percentages during our losing streak, down in the 30% range. Now we've had five days in a row where the average winning percentage of the last 12 days is 75%, so nine out of 12 on the last five days. And so typically, it cools off at this point. And so you typically wait for that draw down, but nine out of the last 12 days is a winning streak, and you usually have more than two losing days in a losing streak.


There is going to be massive equity peaks in the daily report. And these are the trading system signals. You can see 60 minute breakout NQ, up 3K. Gap continuations up 1,900. Tick reversal up on the day, just a gap up continuation move. The bulls are trying to turn this bear market rally into a new bull market, and defying everything that's fundamental, in my opinion. And so just massive liquidity flows, calling for a Fed pivot, calling for the end of inflation, and so we'll see if that happens. The signals did well trading it, and one of the things that we've seen in this market is the smoothest uptrend we've ever seen, and the choppiest downtrends we've ever seen.


So I don't think there's ever been a greater divergence between downtrends and uptrends, where the downtrends are choppier than ever before, and the uptrends are smoother than ever before. And so some of the biggest winners, and some of the longest losing streaks, during the downtrends in choppy time period.


Big gains on most of these strategies. Three days in a row market sold off here, fought back, sold off here, fought back, rallied, sold off here, and then ran it again. And so just a lot of effort by the bulls to just push this market higher, caused short covering, and we never get this smooth of a trend on the downside this year, but we do get that on an upside. It's interesting that you can get such a smooth uptrend in a bear market, but you can't get a smooth downtrend in a bear market.


The market is trading above 13,300. We talked about this a couple of weeks ago, how we anticipated this pattern to accelerate upward, but now we're in what I would consider an overbought market. You hear a lot of times, when the market sells off half this much, that's oversold. Now this momentum indicator is halfway between some of the previous highs. You see the peak right there, and the peak right there, and it's halfway between those. This indicator is halfway between those two previous peaks.


And so I consider this to be an extremely overbought market, although no one is saying that on TV, you'll hear oversold very quickly when the market is moving up and then it moves down, but you won't hear anyone saying the market is overbought right here. And so it's extremely overbought on a short-term technical basis. That doesn't mean it can't keep going higher. Things can sometimes keep going, but I just wanted to point that out. We'll go over the daily trading system results, after the market closes here in a few minutes.

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