How important are the best days compared to total profits?
In trading, you want to avoid negatively skewed trading strategies. These are strategies that have fat left tails and might wipe out all your profits from many trades. You need to understand the distribution of your expected profits and losses. Below is my profit distribution:
When I summarized my trading from 2002 to May 2012, I looked at how much of my daytrading profits were generated from the best trading days. Before I did the analysis, I expected the “grinding” (ie. the small profits every day) to be my greatest asset in trading.
It turns out that the 1% best days equals 11% of my total profits over that ten year period. Whether this number is big or low I don’t know (compared to other traders), but it was actually smaller than I expected it to be. However, 19 of my best 25 days were in 2008, 4 in 2007, one in 2006 and one in 2005.
Here is a bar graph of all my trading days:
What can I learn about this?
- When the markets conditions are favorable I have to be there trading. No holidays are allowed. I didn’t take holidays in 2006, 2008, 2009, and 2010. In 2012, when conditions have been less favorable, I have traded lightly and done other stuff, among other things invested in real estate.
- When the market conditions are favorable, you have to trade size. Looking back, from 2006 until 2010 I should have traded a lot bigger size. I have to go for the jugular when the edge is there!
- BUT! Never underestimate the small profits/grinding. They do add up!
- Perhaps contradictory to point 1, but you never know when a good day suddenly shows up. 1. august 2012 was such a day for me. I made more money that day than all my trading for 2012 until that day.
- I trade too small. My statistics are pretty good, but I have to take a greater risk. Hopefully, my new secondary income in real estate will make me a bit more aggressive.
