2012 Performance Evaluation (Part 6)

For the first time in this blog, I am reviewing my performance from 2001 to the present.  In http://www.optionfanatic.com/2013/02/15/2012-performance-evaluation-part-5/, I reviewed 2011 and began discussion of two changes made in my trading following the summer market crash.

Aside from not trading until after 3:30 PM, the second change I have adopted is a stricter limit on position sizing.  Although it is difficult to nail this down with certainty, the largest long position size (by number of contracts) I would carry today is about 40% of that carried in 2010 and about 70% (about 60% in dollar terms) of that carried in 2011.  I have a maximum monthly long contract limit in mind and I prefer to start out trading 33-67% of that limit.  In most months I do not even reach the limit.

Position sizing has been restricted on the short side as well.  I would estimate my acceptable short contract limit to be 60% or less than what I carried in 2010-11.

One thing that still concerns me is a tendency to see position size creep higher from one month to the next.  This reflects difficulty accepting loss.  Rather than close out positions and realize loss, I look to roll positions for equal or greater credit.  This will boost profitability in a tame market but lead to suffering when the bull or bear really gets angry.

In 2012, the Russell 2000 experienced two corrections over 10% but still moved higher by year-end.  For the first year in four, I outperformed:

With a 53% return and MDD of only 3.6%, this was a dream year for my portfolio.  This was a relatively tame year for the markets, however, as the largest MDD of any major index was only 8.2% (Nasdaq).  I give much more credit to the tame market than to my own skill for the exhilarating performance.  While I feel the updated trade guidelines have helped to stabilize my portfolio, it will take the next significant market correction to truly make an apples-to-apples comparison with what happened in 2010 and 2011.