During the first week of March, my portfolio continued to drop between $5000 and $10,000 every single day.
Like during the 2008 crash and the covid crash, I felt paralyzed and frozen. Yet I had done some things right. Overall, only 64% of my portfolio was invested. Its just that all my open positions were in the high high flying electric vehicle stocks that were being hit the hardest. I had already sold everything else at profit as my portfolio had hit new hits almost every day in January and the first week of February.
I was still $13,000 up from Dec 21 2020, had $133,000 in cash my investment accounts, $38,000 in my checking account and $30,000 cash in my offshore account in New Zealand. Not so bad really.
But the flaws in my trading strategy had become very obvious, and perhaps the dramatic loss was the way to be in some much pain that I would put the effort in to learn the lesson.
Out of pain comes creativity
All my best ideas come while meditation. That's been true for over 30 years, when I first learnt to meditate using Transcendental Meditation when I was 20 years old. While surfing a Facebook trading group, I saw a post showing a chart with a clear Buy indicator. The indicator matched exactly where my AIM system would have put it. It was the first time that I had found a system that was doing exactly what AIM was attempting to do. But much more elegantly and unambiguously.
I signed up with the system, and was impressed by the young energetic team involved. The name "Spice Algo' was quirky, and the tagline "The worlds hottest trading community" self confident yet playful. Over a period of days, I threw myself into learning the new charting platform, setting up the algorithm, and seeing how it worked.
Then I had the insight that really shifted me. What if the Spice Algo could make not only the decisions to buy or sell, but to indicate just the right moment when to reverse a trade. In effect, to never be out of the market, to always be betting on a move to one direction or the other, to move from long to short and back again, making profit on each direction.
Surprisingly, this is a rather unusual idea in trading, because in reality our emotions tend to get in the way, and picking reversals is quite difficult. But because of my investment in my own AIM system, I knew that the right set of technical studies will pick reversals reliably. But most traders spend too much time looking for the 'right' stocks to get gains, rather than seeking to maximize every directional change in a single stock.
Engineering out the human
The excitement of the stock market is the reason traders trade. There is something viscerally thrilling about seemingly making money from nothing but your own wits, research, intuition and decision-making skills. But when you are on the winning side comes a over-excitement, over-confidence, and complacency. When you are on the losing side, you step right into a mine-field of fear, anxiety, paralysis, self-judgement and depression.
What excited me about Continuous Trading using Spice Algo was that potentially there would be none of that, because the methodology was so simple: If the indicator says buy. Hold until it says sell. Then sell the long position and go short exactly the same position size. Hold until it says buy again. Close the short position and go long. Reinvest the profits from both trades in the new long position.
This strategy takes away the nightmare of trying to select which stock to be in when. Pick a stock, use the algorithm to optimize the available profit for that stock. If you get bored, switch to another stock.
You could run the system on 1 stock or a 100. The results would be different, but would essentially work on every stock to a greater or lesser extent. The best stocks would be those with the wildest swings.
The Mind-Blowing Back-Test
The next step was to run a back-test. I picked 6 of the stocks that I had traded at various times over the past months. Some were insanely volatile, others less so. The results were shocking. With 6 initial investments of $15,000 - $18,000 per stock, the system created $112,000 profit from just 14 trades over two months. And these were stocks I had been trading. I knew my trades had often left money on the table, but how much I was leaving on the table was mind-blowing.
Admittedly, those two months had seen huge increases and then rapid decrease in several of those stocks. But that was exactly the sort of wild movement that this system seemed perfectly designed to capture, and it was this real world volatility that had caused my own portfolio to end up nearly where it started over that time, and a list of huge open losses.
And that was stock. What if I had been trading options?
To throw some curve balls I added 3 other stocks and three extra months, so a five month total timeframe. During the first of those months the market had been in a choppy decline. Again, the system didn't blink, just churned out profit. I ended up with $280,000 of profit, trading just 9 stocks in 5 months, and using perhaps 60% of my actual available capital. At the end of the test I would have had over $100,000 of profit still in open trades, with the other $180,000 in closed profits. Out of 32 trades, just four were losses.
I added another high flying, extremely volatile stock into the back test (its not shown below). This stock alone created another $160,000 in profit. Admittedly, the back test was in a highly volatile market. But that meant it was a market that went down dramatically as well. Many traders lost big in this market.
Continuous trading just took the market volatility in it's stride, correctly going short every single time in order to take advantage of the downturn. A downturn that my biased view that these hot stocks would keep going up forever had not seen.
Yet I could see that continuous trading would also do great in an overall rising market. It would just hang on to stocks that were going up and even accelerating in their growth. Because it never really sold too early, leaving often 10% gains on the table sometimes, it was quite conservative. It only really got confused when the market went sideways with big swings. That would be the time when you would need to excercise a manual override and wait for a clearer trend to emerge.
Continuous Trading Back-Test Results
Next Step was to document the system, and create a transition plan for how to gradually merge over my current portfolio full of huge losses into the new system.
Financial Wizard Reality
It it is as successful as my back test, Continuous Trading would take me by the end of 2021 to the
Financial Wizard level of my trading plan, which has a target $500,000 in my trading account and $500,000 in my retirement account.
This represents a gain of $400,000 in my trading account and $230,000 in my retirement account from the balances in early March.
Perhaps surprisingly, this is only a 15% gain per month in each account. I would need to stay very focused to achieve this. The critical success factors are:
1. Following the signals exactly.
2. Scaling up trades using the profits to increase trade size.
Both of these critical success factors is an extreme emotional test, in terms of having nearly 100% of my portfolio invested at all times. If my results are good, it may be better to have about 30% in cash to look for the best possible opportunities, and be able to switch investments.
