Friday Feature: The Scouting Reports Backtest Series Part III: How backtesting shaped my trading
September 20, 2019
Last update: August 2021
“What has made me subpar at trading directionally? After backtesting and going through my journal from the past year there was one key element that was missing from my trading: Profit management rules.”
Justin Driskell —
Hey #TeamTackle, it’s Justin Driskell. Back again with the third and final edition of my backtesting series. We initially talked about WHY I started backtesting. Next, we covered WHAT I learned from the backtest. Now, we will cover HOW the backtesting has shaped my own trading. Let’s talk about what I’ve learned about myself, not only through these backtest but through trading altogether.
I’ve been trading since April of 2018. That’s almost a year and a half of winning and losing and finding what I like and dislike and what fits me. During this time, I’ve come to learn that I’m good at cashflow strategies and not so good at directional strategies. But why? What has made me subpar at trading directionally?
After backtesting and going through my journal from the past year there was one key element that was missing from my trading: Profit management rules. I had no problem taking a loss. I had very concrete stop loss rules that I followed religiously. My problem was how I managed my profits. What I found was that I failed to let my winners run. I’d always get scared of giving back my gains if the price action ran out of steam even for a day. There were a good handful of trades in the past year that if I had good profit management rules, they could have made up for all the losing trades put together.
Let’s look at a couple of examples. First, we’ll look at a trade I made on 3M Company ($MMM). We’ll look at what the chart looked like on the day of trade entry.
Now let’s fast forward a few days to when I took the trade completely off.
MMM was severely oversold and at a major support zone. A retracement was almost certainly imminent and I was scared I would give back all my gains plus we had hit my first target so I pulled the trade completely off. Now lets peak at what MMM did shortly after.
If I had followed the rules that I developed in my backtest I would have only taken partial profits at my first target and let the rest run with a trail stop. It would not have gotten stopped out until this last candle. Using this method would have more than doubled the profits I took off the table.
Next, we’ll look at a trade I did on Apple ($AAPL). Here’s the chart on trade entry:
… and the chart a couple of weeks later when I took the trade-off:
The price hit my target and was starting to slow down. Now, let’s take a look at what Apple did over the next few weeks.
Talk about a slap in the face. Apple had a beautiful run up staying above the 9EMA until the day before earnings, which is when my backtested rules would have had me exit. This would have nearly tripled the profits I took off the table.
Patience! That’s my weakness. At least when it comes to swing trading. It’s a mindset problem for me. When putting on cashflow strategies, you tell yourself before placing the trade that the profits will most likely take time. So its already understood what timeframe to expect, but with swing trading, what I’ve found through backtesting is you really have no idea how long you will be in a trade.
A week?
A month?
A few months?
I like to know these things. My personality requires time expectancies.
Let’s talk about personalities for a second. You’ve heard it said many times that you have to find who you are as a trader. I didn’t understand this until these last few months. I came into the trading world hoping someone would just tell me what to do and I could just do it over and over again until kingdom come. Unfortunately, it doesn’t work that way. There are so many strategies out there. Which ones you like to trade might not be what others like to trade. Along with what strategies to choose, you have to determine what trading time frame fits your personality as well. Are you a day trader, swing trader, position trader, a long term investor, or a combination of them all? There are no right or wrong answers. Just an infinite combination of trading styles, timeframes, and strategies to pick from. There is no “one size fits all” in trading.
With all this being said, I’ve come to determine through my backtesting and live trading that I am primarily a position trader for cashflow and a day trader for speculation. My position trades consist of cashflow strategies like vertical credit spreads and calendar spreads. These trades have clear cut time expectancies. There is an expiration date that I know I will be out of the trade by, usually 1-2 months. Day trading also has a very defined time expectancy. You are in and out in one day. So these styles of trading are what my personality has gravitated to due to the fact that I know how long I will be in the trade. I still swing trade but only use a small portion of my account to do so.
You might find it silly to do all the work I did backtesting just to find out that swing trading isn’t my favorite but that’s part of the journey, isn’t it? It takes time to figure out who you are as a trader. If you are new, I would tell you to expect to spend at least a year to figure out what strategies and time frames you like to trade on. Some people, like me, love iron condors but stray away from swing trades while others couldn’t care less about cashflow and go for the home runs. Once you determine what you like, master it. Focus your attention on that aspect of trading and become a wizard. Don’t try to master everything you’ve learned at the same time. If you’re like me, you’ll find that very overwhelming.
I want to challenge you to backtest different systems and determine your trading personality if you haven’t already. Share what you like to do in the Clubhouse and reach out to other like-minded individuals to share thoughts, backtest, strategies, and systems. After all, Tackle Trading is meant to be a community. Let’s all help each other out. Until next time traders.
Justin Driskell
Justin started his trading journey during a 3-day workshop with Tim Justice in April of 2018. He has always been interested in the financial markets and the opportunity it potentially provides. He likes trading stocks and options. Outside the markets, he’s a husband, father of two boys, and full-time automotive technician.
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Thanks Justin!