2023 Annual Performance Review

Initial Commentary

This year, 2023, was the first year in which I have taken futures trading seriously, and managing my affairs as a trading business. In the past, I'd treated it more casually, making trades when I had a strong opinion that I wanted to express in the market. Some of these worked very well, some less so. But I didn't have a consistent track record of what I was doing and what was working best for me. This year, I wrote out a first draft of my trading plan, committed to tracking every trade, and went to work on developing my individual trading style.

This has been an overall good experience in my first full year of trading full time.
I went through some tough times, and I also had some good times, but most importantly, I've learned a lot. Both about myself, as well as about what works for me in the process of market speculation. I've also been fortunate to come across several great resources that have helped me to improve.

Monthly Returns

I'll start by listing my monthly returns, and calculating the monthly Gain to Pain ratio. I want to be clear that this is only for my trading portfolio based on my Nominal Account Value. One of the amazing things about Futures and Forex is the capital efficiency that you can enjoy. Because of this, the actual capital deployed was only a small portion of my Nominal Account Value.

Commentary

This year had a few different tones in terms of my trading performance.

The year began with fairly rough patch. Of the first 25 tranches I closed this year, 22 were for a loss and 2 were breakeven with a single tranche closed for a small win of 78 bps.

After this challenging start, which went through more mental capital than actual trading capital, things took a turn in my favor as I caught a couple of rates trades that got me back into positive territory. Then in May, I managed to find my way into a Soybean Meal short that was my biggest winning trade of the year. It returned a profit of 493 bps.

Pretty much immediately after this trade, I started my most challenging period of the year. I went through a drawdown that lasted for over 5 months. I discuss dealing with drawdowns in my post on Dealing with Drawdowns.

This fall, I managed to catch quite a few moves across a few different assets: from the year end rally in the Nasdaq, the turn in US Treasuries, and the breakout in Crypto. This led to my largest monthly gain in November. December has been mostly flat in terms of closed trades, but I'm carrying some open positions with unrealized profits into 2024.

Trade Statistics

If you need a review of the trading statistics that I think are important, head over to my article on the Trading Triangle as I won't be going into detail on calculating them here.

Considerations on Trade Window Aperture

Since most of my trades last anywhere from a couple of days to several months, I have to determine how to group trades into a given trading window. In most situations, I am looking at my trade close date as my date of record, as that is the moment which the profit or loss is actually realized. Each tranche closed could just be a partial closure of a position as well, but that doesn't impact this way of looking at my trades. This is the method used to generate my monthly returns listed at the start of this post. It does not take into account any unrealized or open profits in positions that remain open going into the next month or year. It only looks at the moment in which the profit or loss was realized.

Note that this is different than how the IRS views futures trading. They look at your mark to market performance as of the end of the year.

For my trade statistics, I like to group my trades based on entry, with the cumulative gain or loss for all closed tranches as the gain of loss for that entry, even if portions of it were exited at different times. I think this gives the best view into what is my actual risk / reward for putting the trade on, and what is my actual expectancy for trades that I place. For this Trade Statistics section, I'll be looking at that I've opened during 2023, with the total gain or loss on that position. For a few trades that are either fully, or partially open going into 2024, I'll use their year-end mark to market gain.

Number of Trades Taken

During 2023, I entered 118 trades. Of these, I had a profit on only 25 of these. I define a profit as a return above 5 bps, net of fees. I took a loss on 71 trades, with a loss similarly being defined as a return below -5 bps net of fees. On the remaining 22 trades, I broke even, with a return between 5 and -5 bps, net of fees.

Often I get spammed on twitter or email with people promoting some trading system with an 80%+ or even 90% win rate. I never see people advertise a system with a 21% win rate, but that is precisely what I did this year, and I'm proud of it. Would I have preferred a higher win rate if I could keep the same average win and average loss? Of course, but as I explained in the Trading Triangle, that's not really possible. Changing one variable inevitably alters the other two.

Average Win and Average Loss

You can see that my average win was substantially more than my average loss. My profit ratio was just over 6.5 in fact.

With a profit ratio of 6.5, one would need to have a win percentage of only 13.3% to break even. Hopefully this starts to hammer home the point of why I find it so critical to manage my downside. I can't control how many trades that I enter go in my favor, or how far they end up going, but I can control how much of a loss I'm willing to take. I want to stack the odds in my favor as much as I can.

Profit Factor and Expectancy

Both of these metrics measure my profit relative to risk, but convey that information a little differently. You may be aware that Profit Factor is my favorite metric to pay attention to and to manage towards.

A quick reminder that Profit Factor is Gross Winnings / abs(Gross Losses). This means that if your profit factor is greater than 1, your winning exceeded your losses and you were profitable.

Expectancy on the other hand, is the average amount you would expect to gain (or lose), on your next trade, based on the success rate and profit ratio of all of your other trades. I like to look at expectancy as a ratio over the abs(Average Loss). I call this Realized Edge. It is ratio of the amount I expect to win vs the risk I'm taking to achieve that gain.

Gross Winnings and Net Profit

My total return is 14.41% of my Nominal Account Value. Remember that this does include some mark to market profits that may have some give back, or continued growth in 2024, but I wanted to include those in this snapshot as I think it makes the metrics more accurate, since my average hold time on winning trades is much longer than my average hold time on losing trades. As I'm writing this on New Years Day, I'd have to wait until all these positions get closed out to have a truly accurate assessment of my 2023 metrics, and this methodology also aligns with the way that the IRS looks at my trading.

But, this should be compared to my Closed Trade Equity performance. Of the 14.41%, 4.59% was a mark to market gain on open positions. This means that I had my Closed Trade Equity had increased by 9.64%. I prefer to look at my profits from a closed trade perspective, instead of the mark to market perspective. I like to remove some of the noise of daily price fluctuations from the bottom line that I'm looking at, and only count the profit once it's been recognized.

Relative Performance and the Benefits of Capital Efficiency

Why would I be proud of earning 14.41% in 2023, when the S&P 500 went up 25% in the same time period? There are really two answers to this question.

The first is risk adjusted returns. The S&P 500 had two large drawdowns during 2023. The first was 8.77% peak to trough and the second was 11.05%. The larger of these lasted from July 27th to December 8th. This rivals the duration of the large drawdown that I had this year as well, but mine was just under 5% peak to trough.

The second answer to this question, is that I'm kind of able to do both. While I committed $150,000 of risk capital to my trading venture, I am only using a fraction of that to cover the margin on my trades. I funded trading accounts with only 15% of my risk capital, and the remainder stayed invested in equities and bitcoin. So my return on capital deployed to my trading venture is actually 96%. I don't think it's entirely fair to look at it this way though, as I was willing to deploy more capital if needed into my trading accounts.

Distribution of Trade returns

Peter Brandt (@PeterLBrandt) refers to this as the Pareto principle. He has much more experience than I do, but claims that he's never seen a discretionary trader whose results don't fit the description that 80% of profits will come from at most 20% of trades. Often this number is less, as it is for me, where 80% of my profits came from my top 3 trades.

Allowing these trades room to run is especially critical with my style of trading, as I don't get these opportunities all that often, and I really need to capitalize on them when they occur.