December and January were extremely unkind to me. I took a huge loss on December 9 that coincided with the Fed meeting and another big punch in January. In total, I went from a 28% profit to a ~4% net loss.
Deservedly, my inbox quickly flooded with comments and suggestions on the drawdown. The most common of those was to stop trading during news events.
So… why am I still trading during news events? There are a few answers to that question.
It’s not like the strategy loses money on every single news event. It’s 100% true that news events like the Fed meeting can and badly hurt. Say that I’m determined to exclude news events in the future. I’d have to
- Collect historical news event data
- Create a second algorithm, which selects the news events that forbid and allow trading to continue
- Test how the news algorithm interacts with Dominari
- Repeat this many times until I’m happy with the final result
Due to the tiny number of news events that impact the markets like the December 9th announcement, my data set is miniature. The risk of overfitting to historical news events is huge.
Working with tiny amounts of data provides little in the way of long run confidence. Focusing my efforts elsewhere is far more likely to improve performance and requires much less work.
Too many trades
Too many trades sounds a bit naive, so let’s dig into what that means. Dominari trades a portfolio of 7 different instruments. All instruments cross with USD.
Many subscribers correctly observed that the major losses occurred with trades open on all 7 pairs in the portfolio at the same time. A good predictor of trade performance is the number of trades open simultaneously.
1-3 trades seems to be consistently profitable
4-5 trades leads to biting my nails
6-7 trades is neutral to disastrous
Testing and confirming the max open trades rule was quick and easy. 5+ trades is very dangerous.
Accordingly, Dominari now exits all open trades if there are 5 or more trades open at any given time.
The next feature of Dominari will be a reversal strategy. Dominari was clearly prone to sudden equity changes if 5+ trades were open at the same time.
Make the losses work for us
An obvious counter strategy is to open trades in the opposite direction whenever Dominari would otherwise open too many trades. Testing the idea is very easy.
Coding a Dominari reversal strategy, however, would require a major reprogramming of the expert advisor’s code.
The number of trades per year would be miniscule. I doubt that it would average even 1 trade per month.
The idea is that Dominari can be the normal trading strategy. Whenever Dominari opens too many trades, the strategy then switches into reversal mode and trend trades with a simple trailing stop.
Switching direction should mostly reverse the negative trade skewness back in the positive direction. Almost all of the offending trades open at exactly the same time.
If the biggest losing trades opened at different times, there would be the risk of being too late to the party. All blowout trades opening at the same time means that the strategy can realistically reverse 100% of would-be losses into profits.
Sitting at the top of the docket are changes to Pilum. You can expect to hear about those soon so that I can incorporate Pilum into the Dominari signals. Once that and 2 other internal projects are finished, I’ll be able to dedicate the time required to fully implement the Dominari Reversal System.
Equity stop loss
Dominari uses emergency stop losses on all tickets. That is appropriate 99% of the time for individual trades. Those emergency losses reset once per hour in line with the concept of the TODS.
A little of the problem was bad luck. My stops came within a handful of pips of being triggered. Then they reset even further away, which made a bad problem worse.
When all trades move at the same time, then clearly the strategy could suffer extreme losses.
The first attempted solution after the Fed announcement was to add a portfolio level stop loss. The way that I wrote it also updated once per hour. When a second negative movement came in January, I stopped trying to be clever. It’s a flat, simple, stupid stop loss. If I lose more than 4% on all open trades, the entire Dominari portfolio goes flat.
I’m still trading Dominari
I still have my money trading the Dominari system; my confidence in the long term performance hasn’t changed, but it obviously requires safeguards. The max number of trades and the portfolio level stop loss will go a long way to limiting the impact of big moves in the future. AND, I should get the counter-strategy developed relatively soon to turn potential frowns upside down.
Lastly, many of you questioned why I’ve been so quiet. The honest answer is that I needed some time to process what happened. It’s easy to feel overwhelmed and discouraged when you get knocked down. I needed some time to process what happened.
I also needed time to double check the changes that I made to the portfolio were actually beneficial. It’s very easy to appease traders when they’re upset by rushing out features before they’re thoughtfully considered.
My money is on the line (I lost 2,000 euros between the two moves). What hurt my subscribers hurt me, too.