Friday, December 18, 2009

2010 Goal: Active Engagement through practice

Trading non-directional income strategies with options isn't an active type of trading. You place your trades and the best positions are those that you don't have to touch again until you need to take your profits. While this is great in theory, in practice one has to learn to control some degree of anxiety that comes up when you are looking at the positions from day to day, specially when profits begin to show.

I have realized that one of the best ways for me to control the activity anxiety is to use my time backtesting the systems and strategies I'm using over time.

Backtesting gives me a clear sense for how a certain strategy migh perform, but in addition to that, it gives me an active way to "stay busy" sort of speak without actually trading or touching up the positions all the time. When you backtest, you need a set of rules, and by using these rules over and over, month after month, you begin to learn how a certain trade performs, and you also learn to not touch the position just because you're anxious about a certain scenario/condition.

Keeping track of past performance, also helps you to identify how good of an edge you are trading. Will your strategy make money over time? The very first way to test this is by testing with historical data, then you start to build up live results to compare/contrast with your backtesting. Having some sort of "backing" to say that the strategy I'm using has a positive edge is another major benefit from backtesting.

I'd actually say, that having a clear picture of the position win-loss ratio, and its risk : reward profile is a MAJOR benefit for me, specially when I have to enter a new trade after a losing month. Having some information allows me to look past the most recent negative experience and see the long-term benefit of the strategy.

That being said, one of my goals for 2010 is to use a good portion of the time I dedicate to the trading business to backtesting.

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