Review and Discovery: Year-End By, Chuck Root

chuck rootAt the end of 2022, I decided to review all my transactions for the year and I’m so glad I did. In the past I’ve done only a partial review or no review at all. That’s not so good but I had done well trading in recent years and even set some nice personal trading records. The old market saying that a bull market covers up a lot of mistakes, however, rang true for me in 2022. Warren Buffett expressed the same idea more colorfully, “When the tide goes out, we find out who is swimming naked.”

My trading record was poor in 2022 and I endured some persistent drawdowns. I wanted to understand why. A good bull market will help out with gains even if you buy late. In volatile market types, however, you don’t get help buying even a little late. You get your hat handed to you.

I knew the loss count was large but when I looked at everything from the year – WOW! What a big surprise!! Looking through a few large losses, lots of small losses and some gains for the year, I was thrilled to discover some very important adjustments that needed to be made in my trading. I’m very pleased I did a detailed year-end review.

The Review Process1143 CR Image1

For every trade, I looked at the charts and read through my notes that explained why I bought the stock. One good habit I have is keeping a buy sheet with the important information for every stock I buy. Another good habit is keeping track of trades in my log. I looked at each stock purchased on the date and then the chart of what happened after purchase. I was surprised to find that I was consistently buying symbols closer to a top rather than at the turns, when the price comes up from a bottom. I also studied the indicators I use to see what was happening and what they did after each long entry. Last year, we had a “Sawtooth” market. Bull markets run, bear and sideways markets move back and forth. The indexes would take off but just when you expected a good day or week, they turned down with a vengeance. I saw several trades, with good early gains, end up with losses. Luckily, I’ve always position-sized my trades well. That saved me from having larger losses last year.

What Did I Learn?

I saw that I needed to watch the RSI and the Slow Stochastic for the upturn at the bottom instead of waiting until the run was half over. I also noticed that my sell stop execution wasn’t as good as I thought it was. While I determine the initial stop price before my entry, I discovered I was too slow to enter those hard stop orders. Those misses accounted for some of my larger losses.

Another one of my losses – a bigger one – came even though I had entered the stop order. I found that I did not pay attention to the earnings date for the stock. If you want to buy a stock the day before earnings, either wait a day or be ready for a big surprise – a surprise you may not like. In my case, on this particular trade, the stock opened the next day under the stop price I had set. Ouch, that was painful.

After the Review

I made a number of changes as a result of the 2022 review at year-end.

I revised some of the entry processes and edited my buy sheet. Now I put in the earnings date with the other information on that sheet.

I put an XLQ spreadsheet on my desktop that shows all my open positions so I can check the portfolio performance during day. That spreadsheet also shows what the type of stop is in place and where it is in relation to the current price. XLQ is an Excel add-on that accommodates a real-time price feed to your spreadsheet. Mac users have to use Parallels since XLQ only works for the Windows version of Excel.

I also changed my charts. I look at several charts but the last look before execution is a TradeStation screen that shows a combination of RSI, Slow Stochastic and MACD indicators. I reference three timeframes: monthly, weekly and daily to see where each indicator lines up. At times, I may use a 10-minute chart to see where the price is going on a purchase.

RSI – When the RSI line is coming off below or at 30, and turning up, the stock or ETF has a good chance to move up in price. Seeing all three timeframes in the same window is important. If the monthly or weekly doesn’t look good, usually the daily will not look so good after a day or two. I like that I can tweak my indicators or even program my own in Easy Language in TradeStation. The platform has a longer learning curve, but when you get it dialed in, you’re good do go for a thoroughly customized experience.

Slow Stochastic – This confirms a move, as does the MACD, but MACD usually lags a day or two.

Fibs – I use Fibonacci lines to find good support levels, which is important in setting sell stops. Sell stops are ineffective unless you set them at useful levels.

Lessons Re-Learned and Early Results

My performance in 2022 and the year-end review reminded me experientially of lessons I have all heard before – maybe that we’ve all heard – but probably need to re-hear:

  • Traders really do need a set of written rules for trading in different markets—bull, bear, volatile, etc. Van would say something like, “Trade different systems for different market types.”
  • When your rules line up with your beliefs, operating within those rules is easier and gives you more confidence.
  • Risk management and stops are critical for survival.
  • In volatile markets, a nice gain will vanish quickly so use trailing stops to never let go of a good gain.
  • When a stock moves past your entry price, but you still want to get in, let go of the FOMO. Plenty of great trades come along all the time.
  • Understand what you are seeing in the charts and stick to your rules. Otherwise, you will be making all kinds of trading mistakes and getting yourself in trouble fast. (Trouble = losses.)
  • Step back and review your thinking and beliefs frequently.
  • Review your performance on a frequent basis also.

By re-learning these lessons, making the necessary adjustments and then sticking to my revised rules over the last two months, I’ve been doing well so far in 2023. My record is 4:1 gains vs losses.

I don’t know what 2023 is going to bring but I know bear and volatile markets may reappear at any moment. These market types give you no slack. They take your money quickly if you don’t have good rules or if you aren’t executing them sharply. Set your rules, follow your rules, and then check to see how to do better.

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