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Paper Trading wrap up

December 19, 2008

I’ve come to the conclusion that the group’s paper trading experiment may have served its purpose to the best degree that we can expect for some time.  Some weeks ago, I took over duties of being the official keeper of the list and action taker if trades need to be made.  Though I was not there, I was told that when asked at the meeting, no one was interested in taking on the task.  I wrote to the group at that time that I would not do a daily report, but rather an activity statement if activity was taken.  Since the market has been bearish for quite some time, there has been little to no action in the portfolio.  Now that I’m coming up with a bullish or at least neutral posture on the markets, which would allow for acting on buy signals, the question has come up whether or not to re-commence with trading in the group portfolio.

I have decided NOT to begin taking trades again with the group account for a few reasons.  For starters, it seems that there are only a certain number of people that pay much attention to the project as evidenced by the very few who actively participate even if only with the occasional comment, question or observation about the system and its trades.  So it is my impression that there are very few who actively think about those trades made and the considerations of how they are handled.  It is that process that is the true learning experience to be had from this experiment, understanding the why of it all.  Not just getting the results from someone down the road.

Another reason to discontinue the paper trading is a minor (wink wink) problem that was apparent to us from very early on.  The Investools Method for trading using the “3 Green Arrows” system is a bullish intermediate-term trend following system.  We are in a horrible bear market which began only one month after we started trading this paper account.  An argument can be made for a sustained rally to take place at this point in time, but even if the recent lows were to ultimately be THE bottom, it would still be months before the markets would have worked through the damaging affects and momentum of the longer term down-trend and emerge with a healthy bull market.

Nevertheless, the good news is that despite the ill-timed application of this system, our trading plan has nevertheless far outperformed the market.  🙂

As of yesterday’s close, the market has lost 40% since 9/13/07, the day before our first position was initiated.  Our account, all in cash since October 6,  is down 24% and that is including commissions of $10 per trade, which is on the expensive side of reality.  (At $10 a trade and 45 positions, the 90 orders filled add up to $900 or just under 2% of the originally $50,000 account.  A lesson in the significance of how commissions can add up.)

This system can surely still be used with success in bear market rallies, particularly if tweaked a bit, but there is more likelihood of frustration and churning in the account when and if rallies fail more frequently or quickly.  For my taste, this makes it even less appealing to take on stewardship of the group project while also trying to maintain adequate focus to one’s own personal trading approach.

Was it a success?  Worthwhile?  I think so.  On both counts.  We beat the market, the benchmark for all fund managers.  But still, we did lose money.  Is losing LESS money a really good thing?  In the last year, I think perhaps so.  As fund managers who have lost money this year, we’re in very good company.  It’s been a rough ride and apparently some of the world’s most legendary investors have eaten unfathomable losses.  Our losses, however, were due to a bad market and not a bad system.  Still, we have realized ways we could reduce losses, primarily by some simple rules to keep us out of certain trade situations, like an entry immediately before earnings, to name one that comes to mind.  There were trades triggered that we never would have made with real money.  The Market Posture was often dubious, exposing another crucial and more complex system in need of fine tuning.  But there were good lessons learned from the experience and the questions we wouldn’t have even known to consider going in to it.  In the end, our system took only a measured loss on any trade gone wrong and eventually brought us entirely back into cash.  The whole exercise provided good lessons in discipline, patience, objectivity and most importantly, keeping losses small.

In my opinion, this system is as good as any trend following system out there, but we’ll have to wait till the next actual bull market to test it live.  Of course, it’s not necessarily important which is THE best.  As long as you can manage to get into and capture most of a stock’s longer term trend and not worry about buying THE bottom and selling THE top, the magical powers of compound growth will surely expand your loot to great proportions.

One thing is for sure.  Using the 3 green arrows method along with proper money management is unquestionably superior to what is the more popular trend following system and possibly the most often used investment strategy of all………..”Buy and hold.”  🙂

By the way, if anyone in the group is interested in stepping up and firing up the group paper account to test or practice this strategy or any others, please make yourself known.

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