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The difficulty in managing a portfolio, as we all know, is handling "emotions". Most people when they think of emotions think of impulsiveness, recklessness, and not thinking things through. I'm not describing that at all. Dealing with emotions is dealing with my logic and experience. You've got a system handing you signals that have been thoroughly tested in all kinds of markets. But, your intellect wants to use your experience and logic to protect the portfolio from market damage.
You are bombarded with all the facts surrounding the markets and your brain wants to assemble the pieces into a perfect future of the investment landscape. You've got years of market experience, sound reasoning, and other "smart" market pundits and prognosticators on your side demanding you to interject your system's signals. How can you possibly take this next trade when the market's volatility is too smooth? Not enough risk is being reflected in the markets. The market has gone up too far and too fast for too long. The trap door is in plain sight and will open and your returns will fall...right?
This is why I trade systems. To protect my portfolio from the "emotions" of my highly analytical mind. And this November was a wonderful reinforcement of that lesson. I can't stress enough how important it is to review your backtests, especially the drawdowns and corresponding recoveries. Ask yourself, can you still enter trades given the investment landscape in that time period? Really think about this question...because that question will pop up often in your system trading future.
Later Trades,
MT
