It's all about cash flow
The top graph is the US30 (DOW) performance while the lower graph is my personal equity curve (performance). Notice the similarity.
My aim is to generate consistent profits. That doesn’t mean that every trading session or day will be profitable but I want and need to be in a position, as in any business, to be able to budget and rely on profits over time.
In any business, sometimes of the day, week or month will be busier that others and the business owner/manager would plan accordingly. For example, a coffee shop would be busier over lunchtime than it would be mid-afternoon so more resources would be made available over the busy period. Trading is similar, we need to know the best times to trade and more importantly, which times not to trade.
The illustration above suggests that the strategies I use work well in trending markets and not so well in consolidating (sideways) markets. The problem is that we cannot see into the future, so how do I know when to trade and when not to?
Keep an accurate diary of all trades and maintain the equity curve, the benefits are:
I Protect capital. As soon as my equity curve drops – so does my position size and as soon as the equity curve increases – so does my position size. This allows me to reduce risk in quieter (consolidating) periods and increase risk in busier (trending) periods.
I try my best to stick to the strategy and plan. The equity curve measures more that profitability, it tells me when the strategy is profitable and when not. How do I measure strategy performance if I ignore the trading rules and do not have the discipline to stick to the plan?
I cannot measure and budget based on “Tata My Chance”.
Until next time, happy trading.