In September, I had one of my best trading months ever. I outperformed the market by earning a 4.32% return in my portfolio compared to 1.93% for the S&P 500.
That’s a decent return in a year!
However, I followed up this stellar performance with a very poor performance in October.
October Trading Summary
Here is my October Equity Summary directly from my TradeStation brokerage account:
I lost $526.11.
That’s a negative 1.66% return.
My individual performance by itself does not tell the full story without the market context. In October, the S&P 500 rallied 2.22%. That’s MORE than the market went up in September!
I lost money and the market went up.
That’s worst case scenario. A combined underperformance of 3.88%.
My cumulative performance dropped to 3.97% compared to 5.49% for the S&P.
As you can see, the blue line (My Portfolio) dropped below the red line (S&P 500). That’s painful to see. It didn’t happen at any single point in my 13 months of paper trading.
Normally, my performance moves in tandem with the market since I primarily play the long side.
So what happened?
Well, October was a very unusual month.
The rally that started in August and provided many attractive setups in September kept chugging along. However, as a rally extends on and on, less and less stocks provide attractive setups. At the same time, the probability of success for each trade also diminishes.
Like a bullseye that keeps getting smaller.
Now that’s typical behavior. But I don’t think I’ve ever seen the market stay this overbought. One indicator even shows the market being the most overbought in over 100 years. This makes it very difficult for my trading style as I’m forced to sit on my hands.
The good news is that I am still currently on pace for a 17.68% annual gross return. That’s doable in my opinion and would be a very solid return.
Starting from August 11th when I put all our savings in stocks, the S&P 500 is on pace for a 24.42% annual return.
On an after-tax basis, I’m currently lagging 7.03% behind.
I’ll just say right now – if the S&P keeps up this pace, I have little chance of outperforming it.
That scenario wouldn’t be terrible of course. I’d underperform in my active trading but would likely still have a satisfactory annual return. And my retirement accounts would all be killing it!
October Trade Detail
I carried 5 open positions from September into October and only opened 6 new positions in October.
Out of those 6 trades, I opened 5 on the same day (Oct 26th). The market showed the best buy signal of the month after a washout the previous day. On the 27th, the S&P rallied more than 20 points and I took losses.
After being patient for weeks, it was a calculated move, but it didn’t work out. I also got whipsawed on a couple of them.
Looking at the bottom line, it looks like I didn’t lose as much money as listed above. But that’s because this is closed profit. I also lost open profit that carried over from September.
Out of the 11 trades, I had 6 losers compared to only 3 winners.
That’s not an ideal split.
The good news is that I risked less per trade so most losses were not full losses. I normally risk about $180 per trade. There were also 2 breakeven trades.
This is a tiny but very important chart. Looking at my cumulative performance, I still have more winners than losers. On top of that, my average winner is better than my average loser.
Trading is a game of percentages. If you can keep both of these metrics working in your favor, you’re going to have a good result.
After a great month of trading in September, I underperformed by a large amount in October. The market was overbought and continued to get more overbought throughout the month, providing few good buying opportunities.
Even with my poor October performance, my overall performance is still very positive.
Right now I’m patiently waiting on the sidelines as this mania plays out. Eventually Mr. Market will correct more than an intra-day dip and provide a new wave of buying opportunities.