If you have not read Part 1 of my past performance, you may wish to check it out here first.
The story continues. After November 2009, I began to apply Elliot Wave, but devoid of the bearish bias that caused me dear previously. There were some wins and some losses, but the results spoke for themselves. As of July 2010, I had made a sizeable number of trades but still ended with a net loss of US$2000+. Not going anywhere. Back to the drawing board.
It was then that I realised that there were brokers in Singapore that would allow me to effect a strategy I had thought about sometime in 2008/9, and had discussed this in some detail with a friend. It essentially involved shorting leveraged ETF pairs (a simple google for those terms would bring up a host of sites that explain what this involves, for those keen to know more). I originally did not think the strategy would be viable because I could not think of any instruments available to a Singapore retail investor that could allow me to short US leveraged ETFs without excessive hassle or financing costs. I also experimented with a "too simple to be true" moving average system at the same time.
The moving average system was binned after less than a year of experimentation. Essentially while the system in itself could have given a positive expectancy, there were slippage costs involved that would have been fatal. As the system involved trading in the 5 to 15-min timeframe, it was not viable from a lifestyle perspective to be monitoring the US markets late every night. I have no regrets having tried and given up on this.
Which leaves us to the other strategy, which has stuck and since evolved to an extent that it is no longer a cookie cutter methodology that other websites (that a google search may throw up) may describe. I have come to realise that the strategy works very well in bear markets, and not so much in bull markets (where volatility is low). Hence, tweaks have been made to give the shorting of the ETF pairs a directional bent as well, such that my own methodology is currently no longer market neutral (which people would say is the main point of the strategy in the first place). But if you ask me, as long as the cat catches the mice..
Below is a snapshot of what the methodology has been throwing up:
True profits (i.e. with all expenses accounted for) between July 2010 to Dec 2010: US$843.35
True profits earned in 2011: US$30,678.21
True profits earned in 2012: US$8,249.15
True profits earned in 2013: US$55,987.10
It was a slow starter in 2010 and was a real wild horse to handle in the early days of 2011, where I was still learning and trying to control the horse in what was a relatively volatile year. The methodology only got going really in August 2011, where I had a 5 digit drawdown that was erased overnight in a massive rally that left me 5 digits in the green. I could never forgot the feeling of victory in the morning of 10 August 2011. For those of you who are fans of Apocalypse Now, I smelt the taste of napalm in the morning.
2012 was a headache in itself. The markets moved up like a slow escalator in orderly step-by-step fashion. Translation for the methodology? These are the worst conditions possible for the strategy, which thrives on market volatility. I gritted my teeth and roughed the year out but it was a frustratingly dry (and boring) year. 2013 began in very much the same fashion again (on hindsight this is what you get when you are in a large scale wave 3 in Elliot Wave terms) and I knew tweaks had to be made. This was when I decided that at least for bull markets, a directional element has to be added to the system to make it work. Hence now I have a methodology that taps on the leveraged ETF decay that shorting leveraged ETF pairs is all about, but also makes bets to a certain extent on market direction. It's not really rocket science at all but much of the methodology involves making decisions on one's total position size and the ratio of position size between your long leveraged ETF and short leveraged ETF. This is something you can only arrive at after trial and error in various market conditions. So far I have seen forceful corrections followed by recoveries (methodology works well in these conditions) and boring bull markets (works badly and needs tweaking). Unfortunately I have not had the chance to test the methodology in large scale bear markets (such as the one from 2007 to 2009). While in theory the methodology should work spectacularly in conditions of great volatility, it is a wild horse and there is every chance the trader will be thrown off the horse - as this strategy is largely premised on "reversion to the norm", an extended averse movement in the markets can potentially wipe someone (who does not take any timely remedial action) out. So there is every chance this strategy would fail in the future and a search for a new methodology would begin.
So there we have it for past performance, although I am sure I will be delving more into some other aspects in the future. As our minds are ever so susceptible to fallacies and "mind-f*ks" I think it would be a good idea for my clarity of thought to document my thought process and progress with the methology going forward in this blog. Would be fun too. Enjoy the ride if you wanna come along!
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