Regularly evaluating our trading strategy and performance is important for all traders, options or otherwise. Some people evaluate their trades monthly, weekly, or even daily to improve performance and gain an edge. We’ll find some things that worked and some things that didn’t, and we’ll adjust our strategy.
Personally, I like to do a thorough evaluation of my entire trading plan and system around this time of year. Below is a laundry list of items that I review at year end to help prepare me for the next 12 months ahead.
- How did my portfolio(s) perform last year? This is the first measuring stick to look at, but it does not tell the entire story of the year.
- Were there any big trades that moved the portfolio(s) in a big way, up or down? In 2013, the one standout for me was ONXX, up nearly 1500% in about a week back in late June on a buyout offer from Amgen. This was the best single gainer I have had in about five years. The timing was great, and the execution was even better.
- Did I miss out on any big trades due to something I overlooked? I keep a journal and write down notes each trading day. During my yearly review, I study my notes to find out what I missed and why.
- Did I stay focused, no matter what is happening in my life? Events outside of trading and the markets can certainly create mind-bending situations. Further, they can become big distractions and draw my attention away from the trade.
- How is my health? Am I of sound mind and body? You may laugh at this but taking paying attention to your mental and physical health and recognizing the good and bad can be quite helpful as a trader.
- Am I regularly being distracted during the day? I do my best to control and manage my environment so I can always perform at the top of my game.
- What new things did I learn that had an impact on my trading results? I make it a point to read 3 to 4 books annually about trading, technicals and psychology. As a trader, you never stop learning.
(During last week’s webinar, I reviewed some of the above items and discussed market activity and where we might be headed in 2014. You can listen to the webinar here.)
Once we evaluate the past year’s performance, we tend to then ask ourselves: “Will this be a good year for stocks?”
To answer that question, I have to know where the Fed is currently positioned. The first big test is if they are accommodating, and the answer is a resounding yes. Don’t believe me? Just read their statement and listen to their press conference from two weeks ago. We need to pivot off the Fed, because in a liquidity- and sentiment-driven market, they are the suppliers. Regardless of your view of their policy, you can not hate “the player or the game.”
Could they change their minds and move to a more hawkish view? Absolutely, and we will be on guard for that. There are certainly times when the market does not present a favorable playing field, and we’ll play it accordingly. But this is not often the case, nor is it now, and as long as the Fed wants us in risk assets (size is not the point here), then that is where we will be.
Aside from the Fed, I have to be comfortable with where Mr. Market is at the moment, always keeping in mind that things can change on a dime. 2013 was a great year, and the market is still looking fine to trade, but that is only my opinion, and it may or may not come true. Here’s hoping 2014 is just as good as 2013 and that it does turn out to be a very happy new year!
