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I started this trading program on August 3, 2011, and as of today (August 2, 2012) it has been exactly one year. I have published monthly progress reports along the way but it is time to review the performance of this program for the entire year

Date of inception

8/3/2011

Initial funding allocation for this strategy

$248,400.00

Number of shares of DIA I own now

400

Net from trading and dividends received, after commissions, from the date of inception

$15,208.47

Return on the cash reserve/allocated, from the date of inception

6.12%

Return on the cash reserve/allocated, annualized, from the date of inception

6.12%

Cash on hand

$212,069.62

Breakeven price for the DIA on hand

$90.83

Market value of portfolio

$263,485.62

Market value of portfolio over reserve/allocated fund

$15,085.62

The annualized return on the initial capital is 6.12%. It is not great. But, it is OK.

On the day (8/3/2011) when this program was initiated, DIA closed at $118.80. One year later, on 8/2/2011, DIA closed at $128.54. Had I bought DIA with the entire initial fund allocated for this program on the day of initiation, I would have made an annual return of 8.20% plus all the dividends that would have been received.

One may jump to a conclusion that a buy-and-hold strategy would have been better than the program trading proffered here. However, such a conclusion is meaningless because it is based solely on the prices of DIA on two random points in time over the past one year. The only significance of choosing these two prices is that they happened to be the starting and ending prices of this program over the past one year.

Over the year, I had bought some DIA at a price as low as $106.00 and sold some at as high as $132.50. Had I used my entire fund and bought and sold on these two occasions, the return would have been 25%. However, such a speculation is nonsensical because (1) it is almost impossible to catch both the bottom and the top of the market, and (2) it is a reckless act to throw in one's entire fund at only one particular point of time.

So, is there a better way to measure the performance of a trading strategy like this? For that, I look to the long term growth of the DJIA itself. It grew at an annual rate of 6.26% compounded during the past 80 or so years. Suppose DJIA and DIA will continue to grow at the same rate and, on top of that, DIA will continue to provide dividends at a rate of about 2% per year, my trading strategy has not performed as good as if I had adopted the buy and hold strategy.

I, therefore, asked the question: What are the shortcomings of this trading strategy? Chart below shows the progress of the cumulative net of this program trading over the past year and it may provide some clues:

In this chart, the progress of the accumulated net of the program can be broken up into neatly two sections: (1) before 1/1/2012, and (2) after 1/1/2012. There is a clear distinction in the ways the net increased in these two periods. What caused this? Here is my guesses and answers.

On or about 1/1/2012, DIA broke above $120 as shown in the chart below and I became cautious.

(click to enlarge)

Before that time, I had been buying and selling 100 shares of DIA when the price of DIA had dropped or raised $2. But, after 1/1/2012, when the price of DIA rose above $120, I became cautious and started to trade at a price interval of $2.50 instead of $2. The trading frequency diminished dramatically after that, as shown in the chart below which shows the monthly trading volume of the program.

I think these are the shortcomings of my strategy:

  1. The larger trading intervals after 1/1/2012
  2. The market marched straight up in the first four months of this year which does not favor this strategy, and
  3. The price fluctuation of DIA in the most recent three months had been much less that in the last five months of 2011.

Therefore, in late July of this year, I have amended my trading strategy as follows.

  1. Within the Bollinger Bands of -1 and +1, I would trade 150 shares each at a price interval of $1.50,
  2. Between Bollinger Bands of -1 and -2 as well as +1 and +2, I would trade 100 shares each at a price interval of $2.00, and
  3. When Bollinger Band is above +2 or below -2, I would trade 100 shares each at a price interval of $2.50.

I adopted this new strategy at around July 20, 2012. It may take a few months to see the full effects of this change.

About 80% of my portfolio is in cash, as shown below. The challenge is how to use this cash more efficiently while providing sufficient fund to meet the potential drastic market actions both to the high side and to the low side.

Source: Poor Man's Program Trading: One Year Later