Energy analyst Brynne Kelly discusses term structure in crude oil and natural gas, as well as what happens when markets invert.
We all run two systems: our trading rules and our emotional rules. I think making money over the long term is about being a master of both systems. In the short run, your trading rules can benefit from luck.
Our habits or paradigms really tell us what we are feeling on a deep level and steer our behavior, and our behavior predicts where we end up in life.
I think this is why you can know some really smart people but they can't trade. Two, it can be tied to why some can make money but can't keep it. It's absolutely why anyone can learn to trade, but few can actually do it. They aren't built the right way emotionally for the profession.
Bull markets reward even the worst systems with net long exposure, but when the markets turn is really where the money is made so to speak.
How does your trading serve you in that regard, because sometimes people trade for more than the money. They think they want the lifestyle because they see the outward expression of the results without fully understanding what it takes to get there.
If you're not getting results that you'd like, you're likely going to have to change your behavior, perhaps more than your thought process.
If you believe that humans are pleasure seekers, you might believe that we do what feels good. Therefore, changing might not feel good until it becomes ingrained and habitual. In order to develop new habits, you have to subscribe to massive repetition and consistency.
What are you willing to NOT do to improve your trading results? Sometimes it's removing a factor or parameter that helps you get the outcomes that you want more consistently in a probabilistic endeavor such as trading.
Here are some good questions to ask yourself:
Can you stop daytrading or short term trading to make room for longer-term winning trades?
Do you feel like you're in greater control by trading more frequently?
If that's your belief system, and you're not making money, would you say that your need for the feeling of control is greater than your need to become a successful trader? That is true for many an aspiring trader because they haven't felt the feelings around what being a successful trader is, so they have no after-the-fact or "a posteriori" knowledge. Are you willing to let go of those feelings around control to evolve into something more than you are now? This is what I mean when I speak about 'surrender' - I'm not talking about giving up, but pivoting.
What does it feel like to make decisions with uncertain outcomes based upon short-term random data?
The more you can live with the uncertainty, the more money you'll make. Think in terms of increasing the odds or probabilities.
Sometimes the best trades are the ones that you don't enter.
I know this might sound cute, but entering orders around big announcements can be a big gamble.
Consider how you feel around trading the EIA, API, NOPA Crush numbers, quarterly earning announcements, and the FOMC announcements.
Are you keeping orders on the book or do you lift them? Is part of the payoff the excitement around the trade ?
Lift the orders around these moments of uncertainly. If you're trading options, that's a different story.
I don't think it's a good idea to make your bones trying to trade announcements as a strategy. Allocators won't know how you can model this in a way that has high expected values, and in today's world, low daily volatility.
Cancel existing orders around the releasing of key data points. I'm not saying to offset existing positions.
Advisors to HNW clients are in the business of gathering assets and wrapping them up in a "fee for service" asset management program built around an asset allocation model.
I know they like to call themselves "money managers" but they don't know their asses from a hole in the ground about portfolio management. Their sole focus is to get in front of money in motion. That's why they have as many as 5 securities licenses, in addition to the health and life insurance licenses.
You can bet that if their clients are considering an alternative investment or managed futures, that the Financial Advisor will have a product in-house to allocate their client funds into (and get the fees too). This isn't altruism.
Your best leads - the Glengarry leads - will be the people you already know who deal with commodities as part of their business. They understand the cyclical nature of commodities, they have superior fundamental knowledge of the business, and they understand basis risk.
These are the perfect candidates for you to market your services to. The less you have to explain to someone about how commodities work, the easier it will be to get your message across. If you run a long/short equity fund, these are good candidates for you too as they inherently understand the nature of shorting / short selling.
You typically need to register when you are going to be marketing a great deal and holding yourself out to the general public.
You can hold off from registration and take advantage of what are called "de minimus" exemptions and avoid paying the fees and doing all the paperwork until you have a certain number of clients over any 12-month period of time.
On the RIA side, you can register by state or with the SEC. There are asset levels that would mandate your registering with the SEC regardless of the number of clients.
One thing I'd like to stress is that most potential clients are not going to understand anything about registration.
Two, being registered will not make raising assets any easier. Clients are not going to show up just because you are registered. I think many new traders go and register because it will give them a sense of security or clout.
IMHO, it doesn't do that. All it does do is create busy work for you so that you can avoid the rejection you get from having to ask people for money. I'd save the registration fees in that regard, find some clients, and then go register using some of the management fees you've earned.
If you have a trading grubstake, and enough money to pay your expenses at the beginning of your career, spend the time and money raising assets. Everything else is a distraction from what will get you to where you want to be.
Getting assets to manage is the key to your success and growth. Focus on that process. Your track record will come over time. If you want to grow your business, double your asset base.
For example, if you're running $1,000,000 right now and you want to grow, go get 4 new clients at $250,000 each. That's the fastest way to double your asset base and increase your fees. If you achieve 12% RoR, it will take you more than 6 years via internal growth because your fees would come out of the account. You can get 4 new clients in a few months or less.
Save your money and don't buy shit you don't need like computer monitors, a fancy office, or registration fees. You can't buy your way into success - you have to trade up to it and gather net new assets.
Make sure you allocate funds to your marketing budget first. Don't skimp on the quality of your handouts. I'd create a nice 4-pager that folds over, in color, and have a bio about yourself, a summary of your trading style, and how what you do fits in with other managers. Unless you have 12 months of return data, I'd keep the performance in the Disclosure Document. Else, you'll be needing to update the color handout and color printing can get expensive quickly. You can write up the summary, get the headshot, and then have someone at upwork.com design and put together the 4-pager for you for a few hundred dollars.
Get a high quality head shot with a professional photographer. Do not, under any circumstances, use a cropped photo from a wedding or formal in which you were wearing a tuxedo. You can get a pro photographer to take a few dozen shots of your for a few hundred dollars. This is money well-spent.
You don't need to have all the social media channels on your firm's website. If you goal is to make professional connections, I'd use LinkedIn and leave it at that. That's the platform where people expect to get solicited and make business connections.
If you have Facebook, Twitter, Stocktwits, Snapchat, Instagram, and Google+, you'll need fresh content for all of those channels at least weekly. It looks bad if you sign up for Instagram, post one thing, and then abandon the channel.
I would be very judicious in posting personal things. That includes pictures of you and your frat brothers, political opinions, or thoughts about President Trump or Secretary Clinton, for example. Unless you don't care about polarizing your audience, do what you think is best, but I'd avoid such themes in my sharing.
You might offend a potential client and in the beginning, you can't afford to turn people off when you're trying to turn them onto what you can do for them.
Add this all up and you have the start of a professional appearance. You'll find though, that you still have to do outbound marketing in order to raise money. Setting up a website and a few social media channels is a good way to engage people, but you still have to ask for the money.
You need sales training to raise money. If you're afraid of rejection, you have to hire someone to do this for you. Money will not walk in the front door because you are licensed, have an office, or even a decent track record.
You need to ask for the business, ie, ask for the money. Clients will not decide unless you ask them.
In the beginning, you might not be able to hire anyone because of lack of revenue. That means, you'll have to learn to raise assets yourself.
You can rehearse and practice your "pitch" by recording it into your smartphone. Then listen back to it and hear your own voice. Are you exhibiting confidence? Where does your voice change, crack, get louder, emphasize certain points of a sentence? This is revealing information because as you know, any type of verbal communication is a combination of what you say and how you're saying it.
What do you sound like to yourself? That's exactly how you will sound to potential clients.
Record yourself reading your disclosure document. Record yourself explaining your trading process and risk management. Then record yourself pitching a friend or colleague and have them ask you questions about what you're saying. See if they can poke holes in your presentation. By doing this, and getting a little uncomfortable now, you'll be much better presenting when it counts.
I promise you there are guys running money who can't spell "disclosure document" but they are good salesmen. If you think that isn't fair, you might be right, but at least you know now that you have to find a way to sell and raise assets.
What do you do when you have all your capital committed, but you get a NEW trade signal before you get stopped for a loss or take a winner to free up some buyer power?
This can happen when you have a smaller account. It can also happen if you have a larger account, but have a maximum amount of the account that you commit to margin.
If you have a smaller account, my recommendation is to sell the biggest loser to free up the cash / buying power. This is done before your protective sell stop is hit.
In my experience, trades that have made me money did so from the 'get go' so that's why I puke out the biggest loser at that time. I believe that you'll be better served by taking the new trade that has momentum behind it.
If you have a larger account with a "target margin percentage" based upon the total assets under management, you can set a circuit breaker to make a rule around this occurrence.
For example, you might have a rule that allows you to commit as much as 15% of your capital to margin in your futures trading account. That means $150,000 for every $1,000,000 under management.
Do you allow it to go to $200,000 intraday? Do you offset the biggest losers or oldest positions that do not have unrealized gains in order to free up the margin?
Look at your backtest and see how many of those losing trades came back to be winners. In my experience, only a small percentage will (at least based upon how I trade).
Many of these new trade signals will be for additional risk units to existing winning trades in your portfolio if you have this as part of your system, that's why this rule is important.
It's not uncommon for me to have initiated 4-5 trades (in different names), only to have 1-2 knocked out for losses, 1-2 be flat, and 1-2 show modest gains. Once in a while, one position will run like the wind. [Sometimes, I get knocked out for losses across the board - fun times...]
If I get a signal to add to the winner, the margin has to come from somewhere if I have not gotten stopped or taken a gain from a system generated order.
When you trade with a system, you'll find that a few times a year the markets just stall right when you have a few positions on. Once this happens, it's important to remember that you have to play superior defense and protect your capital.
Professional traders sometimes use what are referred to as "time stops" to offset risk. Here's how to do it...
If after you get long, for example, and the market stalls and there is no real movement in your position up or down over the next 2-3 days, offset the trade and go to cash.
That might mean a range of $0.20 up or down from your entry or 1/4 point if you trade commodities. You can define what you feel your definition of the market being "flat" is.
The best trades make you money right away. From looking at my own backtests, I found that upwards of 70% of these trades that "stalled" eventually lost money. I pre-empted that from happening by offsetting them before they could get stopped for the max loss that I was willing to take on the trade.
So, I wasn't technically making money, but I was "losing less." Either way, I had more equity in my account that had I not utilized this strategy.
Backtesting is valuable for system design, as well as getting emotionally prepared for what's possible.
It shows you what your gains and losses would have been had you followed your rules over the previous time period that you're testing.
There are more things to measure besides gains, losses, and drawdowns.
For all the trades that you make, you'll have commissions and fees that you can calculate given what of your trades get filled. There is no cost for entering stop orders.
If your backtest generated $60k for last year, but you didn't consider the effect of commissions and fees, you might be surprised to find that you also generated $40k in commissions. Therefore, your net trading profits are $20k - a big difference than $60k.
Worse, you don't typically get filled at the price you entered in your order. Stop orders become market orders once elected. That means "you get in line" for the next fill based upon "Priority, precedence, and parity."
The difference in the price that you entered in your order and the fill price is called "slippage" or "skid" and it comes as a cost to trading. You can add a number to your simulator to represent the slippage in your trading simulations that will represent the impact it will have on your trading and your P&L. This will give you a truer sense of what you're endeavoring to do as a trader.
Therefore, I'm concluding that when you overtrade, you're getting the worst of it: you're losing money, paying higher commissions, and losing money from slippage.
When try to overtrade your way out of a drawdown because you feel more frequent trading means more opportunity to win, you make a bad situation worse.
The duration of your drawdown is "how long" it takes you to get back to the previous high. It's one thing to be down 10%, but how long will it take you to recover?
If your losses are "in model" there's no reason to panic. You can get this information from backtesting your rules in a simulator. If you are trying to read charts, you're out of luck because your activity is based upon guesswork.
While you're enduring a drawdown, your instincts might lead you to begin trading more frequently.
Greater frequency of trades doest not equal greater opportunity. Most trades are suboptimal so I think you'll do better in any case by trading less.
Your instincts might also lead you to "investigate" a new trading methodology to "overlay" on your existing rules, such as option selling because it brings in "revenue." You can lose your a** selling options.
Behave consistently as you would when you're up 20%. All you do is follow your rules. Take it one day at a time.
Meditate on how you feel when you have to be patient. You might feel anxious, depressed, angry, and frustrated to name a few. I don't believe your can overtrade your way out of a drawdown.
You may also consider trading a larger position on something that you are "sure of" because "...if it only goes up 10%, I'll be back to even."
"To every thing there is a season, and a time to every purpose under the heaven" - King James Bible
Your trading rules might be "out of season" with the market. If you're a commodity trader, you know those markets are cyclical - so no surprise there. If you're an equity trader, sectors rotate so your winners will ebb and flow in secular markets.
You will go much further as a trader if you understand that losing money and drawdowns are not a reflection of your ability to create alpha as a trader. But how you handle losses and drawdowns emotionally and behaviorally will provide you and others insight on your managing larger sums of money. Investors and allocators need to know you can be trusted.
If you want to be a professional trader, losses are part of the business. How you deal with losses, collectively called drawdowns, differentiate the amateurs from professional behavior.
If you're down 20%, you need to do 25% to get back to even. This is important because you don't participate in the upside, ie, absolute performance, until you actually make the client money.
Your sharing in the profits are called Incentive Fees or Profit Allocations and they are benchmarked against the initial account balance, aka, the "high water mark."
Your ability is going to be measured by performance or alpha, but also how little you lose. Risk adjusted returns therefore are your goal. If you can garner market-like returns but with only a fraction of the drawdown, you'll be able to differentiate yourself from the competition.
[Remember, the riches go to the salespeople. You need to learn how to ask people for money. It won't typically show up just because you have great risk adjusted returns. You need marketing and sales to 'show and tell' your performance.]
Shorter time frame trading does NOT give you more control over your losses or drawdowns. It just means that you're likely to "die by 1,000 cuts" instead of taking a position and hold the risk over night and over the weekend. Those are good risks to take. Selling or offsetting your trades because it's the end of the day is known as "bad risk" - full of giant opportunity cost. In effect, you're leaving money on the table by not taking trades home.
In order to minimize the impact on your P&L and also on your emotional constitution, you can take a haircut on your equity when you're in a drawdown. If you get to 80% of a previous high water mark, you can trade based upon 60% of your remaining equity, and effectively trade 48% of your original capital. This helps you trade smaller when your system is not aligned with what the market is doing. Your bet sizes will be based upon a smaller capital base.
Set a max drawdown limit for the day, week, and month to keep your losses in order. Examples can be "never lose more than 1.00% of your overall equity in one day," or "stop trading at -9.50% for the month" thereby avoiding a double-digit down month.
This infers that if you're at -9.50% on the 20th of the month, you stop trading until the start of the next calendar month. This may seem counter-emotional to you when I've told you to stick to your system, but you can benefit greatly as a professional trader/PM if you can say that "you've never had a down month of 10% or more." This rule is a circuit breaker in your system.
Talk to prospective clients about how they deal with losses. If you show them that you have a superior methodology for dealing with losses than the other managers they're dealing with, there is an opportunity for you to capture those assets under management.
Gains look like gains only to the extent that you keep your losses small.
Most traders lose and quit the business in frustration because they are underfunded, focused on short-term time frames, and trade to large for their capital space.
You can gear your target RoR for a high number, like 100%, but you'll also have to endure a drawdown of 40-60%.
I'd focus on consistency in your approach and your discipline. That is what you bring to the table that amateurs cannot. If the average person could act consistently around managing risk, there'd be no need for portfolio managers.
Risk-adjusted returns are the key to getting an allocation. Sure you can get big returns, but at what risk to the operation? Anyone can roll the dice and hit it big once or twice, but that's not how to build a business. Those type of results appear from random luck, not a bankable process that can be repeated like a robust trading system that can be deployed across many markets.
This podcast episode was inspired by a great email that I got about one particular trader's performance and a few of his discussions with "prop trading desk managers" (read: brokerage).
There aren't many prop trading firms out there. Most are brokerage masquerading as prop trading. True prop trading is a firm that will give you funds to manage WITHOUT your needing to deposit your own funds because you are talented.
If you want to trade your own capital, wait 6-12 months and see if you've developed a sense of trust with the firm. Making a deposit to an account makes you a brokerage firm client, not a prop trader.
We make predictions all the time, so why not in your trading?
Professional traders will backtest and then add new elements or parameters to their existing system(s).
Markets will evolve also, so you need to keep pace with evolving market environments. That means experimentation with something new.
You can also test your hunches within the discretionary percentage of your trading. For example, some traders are 90% systematic and 10% discretionary.
Test your predictions and hunches in the 10% discretionary allocation. Just make sure to follow you risk controls, ie, max risk per trade and correlation studies before you put on the trade.
I think prediction gets a bad rap because anyone who doesn't have a system is effectively guessing at the market. That typically doesn't work out that well for too long until your rules get systematized. For one, you need to have rigid risk management techniques in place.
It's likely that you will blow up if you put a large percentage of your capital on any one idea based upon a prediction or hunch. Risk 0.50% instead of 50%.
Your feelings aren't facts and it's better to gauge your reasoning with proper risk management. There will always be new ideas to trade, but if you roll the dice on one name based upon a prediction, with no training, you're likely to get the worst of it.
Many of our students set goals based upon what they want the end result to be. Hard to have ownership of going from point A to point B if you don't know how to get there.
Typical goals could be delineated accordingly: "I want to gain 15 lbs of muscle," "I want to lose 10 lbs of gut fat" or "I want to earn $X or X% this year."
Instead, focus on what you have to do to get those results.
For example, replace "I want to gain 15 lbs of muscle," say "I am going to the gym at 5 am M-T-Th-F each week before I get to the office."
Then you can break down what exercises you'll do each day to breakup the workout so you don't go nuts, but also so you'll have much more ownership about the process. You can envision going to the gym and the exercises you'll be doing more than what you'll look like having lost the weight or adding 15 lbs of muscle.
Professional traders focus on process, not results, so this type of thinking is in line with best practices.
We find that when our clients or students focus on the the process of what they're endeavoring, they get better results, perform more consistently, and enjoy the process of achieving their goals.
You can also make the small adjustments that you might need to make after several weeks, like adding an additional day of rest or adding cardio.
Frustration is the antithesis of confidence and euphoria. It can cripple you and distract you from your sense of persistence and determination.
Unlike other teachers, I don't put a negative connotation on euphoria - as long as you don't abandon your trading rules, have at it.
You can avoid frustration in the first place by "not" having expectations of the outcomes of anything (or any trades).
This is not the same thing as Expected Value, but an emotional expectation about the result of something you're endeavoring - such as trading.
One sure-fire way to decrease frustration in your trading is to make sure that you're protective stop is not placed inside the 20-day ATR of the instrument that you're trading.
For example, say you're trading an instrument that has a 20-day ATR of 15 points. If you're long and the current market value is 535 and you've placed your stop at 530 because you have set 5 points as your max loss point, you are more than likely to get stopped given that you're stop is well within the ATR. Many times, traders with smaller accounts do just this because they don't want bigger losses. This is respectable and totally understandable.
In our coaching and teaching, we've found that traders disregard the daily vol of the instrument their trading as if it was going to change because the trader put a trade on.
We can't change the nature of things. The instrument that you're trading isn't going to change how it behaves just because you're in the trade.
In the above example, you can trade a smaller position and give your smaller position a greater latitude by placing your protective stop at 520 (535-15). You can test this strategy. You might find that you are not getting knocked out of as many such trades and, if you are trading in strong trends, take the risk home overnight and let the market forces, time, and leverage work for you.
Although most people speaking about Bitcoin or crypto currencies can't tell you what the significance of blockchain technology is, I've read stories about people quitting their jobs to become bitcoin traders because of what they perceive as the opportunity of a lifetime.
I remember the hubris during the dot.com boom very well. Regular Joes who had 9-5 type jobs were quitting their jobs and becoming day traders or SOES Bandits. Most eventually blew up. Some committed suicide or "went postal." They'd quit their jobs to become day traders and they used their 401k rollovers from the jobs they'd just quit to grubstake their trading account.
You can read a good piece about SOES and the environment at Themis Trading.
If you are considering this, please think twice - it's hard enough to get a good job that you like in the first place. You can be a trader by night and "keep your day job" so to speak.
Trading is difficult even in the best of times and when the markets turn for the worse - and they will turn - traders who have not had years of experience across various market cycles and no training to boot, will be left holding the bag.
Instead, learn to place your orders either the night before or the morning of the trading day. You can be sent alerts if your orders are filled at which point you can enter your protective stops. Although I don't do it myself, you can do much of this from a smartphone.
I'd recommend doing this for a year before you make a big leap employment-wise.
Many newer traders have a hard time paying their bills because they are trying to pay for their expenses from their trading profits. When the profits dry up as they do for every trader at various times during the year and career, traders can become reckless and take unsound risks because their actual performance is not what they had forecasted. Hard to make money when you're trading with scared money.
It's best that you keep your funds segregated: keep money for your bills in a savings/checking account and your trading corpus in your trading account.
Stoicism can help you develop your overall philosophy and way of life around trading.
However, you can't philosophize your way into emotional intelligence. Trading is experiential and that is the only way you'll be able to learn how to conjugate your trading rules with your tolerance for risk and your level of respect for the markets.
A good site where you can learn a great deal about stoicism is Daily Stoic.
Randomness is omnipresent. It's everywhere in your life and in your trading.
On any given trade, it's hard to determine if I had good or bad luck, if I have any skill, or if I'm in the right place at the right time.
But once you have monthly returns from over several years of trading you can begin to run statistical analysis to get a better idea if you are good or lucky.
If nothing else, the concept of randomness keeps me grounded or sober, in that "I am powerless over the markets."
A great place to learn about the role of randomness in your life and trading is Nassim Taleb's Fooled by Randomness. I recently listened to the audiobook version after having read the hardcover book 6 times. I found that I (think I) heard things for the first time.
Monte Carlo simulations show you how starting dates can alter your performance. If your first trade was on September 1 and that path led you to a 20% drawdown, you might find that someone trading the same system but starting two months later was up 25% by EOY, while you finished at breakeven.
FYI - if you are working on a trading system, make sure that you include data from companies that went out of business, were taken over or merged, or instruments that were delisted, else you have only a list of survivors.
For example, if your system would have had you long Enron, you'd like to know how that trade affected your P&L, as well as that of CMGI or any of the other dot.com stocks that blew up circa '99 and '00.
If you would have traded Pork Bellies back in the day, you should run that data through your simulator also although the contract has been delisted from the CME in mid 2011 because of lack of interest and trading volume.
Doing this will at least simulate the "worst case scenario" in your backtesting.