Category Archives: Trading

Posted on

Silver Reversal Study & Reader Question

by

silver.reversal.study

(click for a larger and clearer chart)

Reader Question: How were we supposed to know it was a reversal in silver, even though everyone was talking about it?

Answer: I think intraday reversals can be tricky, so don’t feel bad (unless you like feeling bad, then really feel bad). The intraday reversal is depicted in the candle in the red box in the chart above. One way to look at it is after a large spike up in price, does the price hold above the open intraday, and does the price close above the open.

Look at the chart below (Silver hourly):

intraday.reversal.silver

(click for a larger and clearer chart)

Silver opened around $47.20 and rallied up to $49.20 — then it plunged in three large red candles. The red arrows point to the approximate open price. Once the contract trades through that price, it has given back the day’s work. Since the market had been on a fantastic bull streak, your job is to be extremely diligent in taking losses quickly and protecting your capital.

Many long traders place their protective sell stops right below the open ($47.20) or within the opening range ($47.20 – $47.60) . In markets like silver that have gone parabolic, some traders short tiny positions of 0.2% of equity (2 tenths of 1 percent = .002), for example, at these same prices in order to capture the deluge of selling pressure that they believe will occur once this treshhold is achieved. If the sell off is extraordinarily violent, the very small position will be gigantically profitable.

As always, the goal is to trade small and keep your losses small so that you can make outsized gains when the opportunity for very asymmetric payoffs become available.

Posted on

Tiger Woods Needs a Trading Tribe

by

I read Buzz Bissinger’s Tiger Woods is never coming Back on his recent performance at The Masters. “End the agony, Tiger. Come back from the exile. Forget the shattered pieces that have turned you so joyless. Just win the thing. Not for the sake of us but for the sake of yourself. Just win it.” Like Bissinger (who’s work I like) I am a Tiger Woods fan. But I believe that there is more to Tiger’s poor play than just missing his kids: his overall emotional golf system.

Having watched Mike Tyson get knocked out by Buster Douglas live, I am aware that outlier events occur in sports as well as in the S&P 500 trading pit. Like Tyson, who floored Douglas with a right uppercut at the 42 second mark of Round 8, Woods made a bit of a charge at The Masters, but he was ultimately derailed. Tyson never recovered as a professional boxer. Tiger may be relegated to moments of genius, and maybe a full comeback, but he has a lot of work to do emotionally. Bad golf is the runny nose, a symptom of what’s going on inside his head. There’s something deeper going on.

Tiger built his system to become the greatest golfer in the world, but there were many other components to the system to consider. Tiger’s trysts were an integral part of his overall system whether he knew it or not. Yes, he consciously made bad choices, but the emotional payoff for him at the time was very rewarding. It was the emotional equivalent of a free call option. Neither morals nor ethics were heuristics in this model and as reported, it cost him his marriage and a large legal settlement that makes his ex-wife one of the largest potential allocators on the planet now. (Emerging CTAs and traders rejoice!)

Remember, we run our systems based upon what we know and what we don’t know, the feelings we’re conscious of, and the motivations within our subconscious. Tiger Woods needs a Trading Tribe™ to figure out what his feelings are trying to teach him. In that regard, Ed Seykota may be the most valuable person to Tiger’s recovery than any of his golf coaches.

Take his assignations away, and he’s lost an integral input in his model, up to the time he got “stopped out” in the Cadillac in Florida on Thanksgiving. He built his fame and competitive skills around the following:

-Being away from newborn children who scream and cry
-Not having to support his wife who was recovering from pregnancy
-Rejecting his wife sexually
-No regard for bringing shame to the name of his father and mother
-Being out at clubs meeting potential sex partners
-Illicit sex with partners outside his marriage
-Hiding the sex from his then-wife
-Lying about his whereabouts
-Deceiving and lying by omission about his trysts from his sponsors, agents, and business managers
-Employing friends and business associates to book hotels and travel for his “rides.”
-Paying for his illicit personal activities through his business with pretax dollars
-He used his power so others would not challenge him and his behavior; megalomania
-Feeling invincible in that he had special rules a la Leona Helmsley

Each of these actions had an emotional payoff. Collectively, they had been integral inputs to Tiger’s system for golf greatness. Ed Seykota has said that sometimes people trade for reasons that have nothing to do with trading. In that context, Tiger may not have the need for golf that he did since he can no longer get the emotional payoff he was used to getting. I’m not saying Tiger doesn’t love golf, but it’s hard to say that he didn’t love everything else that goes with it. Being a professional golfer was the perfect platform to enable him in his sex addiction. Tiger is going to need to find a way to replace those feelings with healthy choices. Until he does, I think it is unlikely that we’ll see the same Tiger on the golf course that we once had. Personally, I hope he turns it around.

In his book Clutch, Paul Sullivan quoted Tiger: “I’ve put myself there, in that situation, more times than anybody else. I’ve also failed more times than anybody else. But along the way, you do succeed.” This was only part of the truth, and on some level disingenuous. Who’s to say that winning at golf was only a step in the direction of his real goal — having lots of sex with many partners, all because he was a famous golfer.

I am no one to judge Tiger Woods, but I think his example is a great learning opportunity of how one’s emotional system can be so integrated into one’s professional life (and traders are not immune from such behavior). In recovery, Tiger has to run his new professional golf system, one without the integral emotional feedback that he’s been used to for the past decade. That’s like telling a big global macro fund that they can’t trade forex anymore.

To say otherwise would be disingenuous about his real system.

Trading Tribe is a trademark owned by Ed Seykota.

Inner Voice of Trading

Coming this August

Posted on

Dec / May Cotton Spread Revisited

by

cotton.spread

I wrote about this spread nearly two months ago and the holding period is about to come to an end circa April 22. The spread initially narrowed further (lost money) to about 90, and has since widened to 66.37 trading above the cost basis of 68.54 ever so slightly.

I received a few emails about this spread and how it’s quoted. Most were looking at it from a May point of view since May has been the higher price. Yet this spread is quoted from what you do with the December contract. When the spread becomes more negative it is narrowing. When it is negative, like it was in this case, and it increases in value (-90 to -66) the spread is getting closer to zero and is thus widening.

When you buy spreads, you want them to widen and vice versa for selling spreads.

Posted on

Don’t Bring Band-Aids to the Trading Desk

by

“When you are in a boat that springs a leak, you don’t drill another hole to let the water out.” – Tony Saliba, from Market Wizards

I read a blog post a few months ago about how to deploy an options “repair strategy” on a commodity futures position that was losing money. I don’t think the author had any clue about what trading is about. He called it a band-aid strategy. It occurred to me that the whole article was written to help his clients (and probably the author) avoid the feelings around taking losses.

There are no band-aids in commodity trading. Although written with extreme detail on how to overlay a few options to an existing outright position that was losing money, I would not try fix a position by adding other options or futures contracts.

The Best Ideas Are Simple

The best ideas are very simple to understand and simple to execute. If you have a losing position, get out when you start losing money. Adding an option to a commodity futures trade creates drama. What happens when your new “synthetic position” starts losing money? What will you reach for then?

If you have a losing commodity futures position, don’t try to create a spread by buying or selling a deferred contract. This creates drama too. Unless you are familiar with spreads, it will also create more drama. How do you know that the spread is not trading near full-carry?

If you have a losing position, get out of it. You will be able to see more clearly and without emotion while you don’t have the position still going against you. By doing so, you won’t waste valuable mental energy on a losing position. You will cut the opportunity cost by getting out of the loser and finding another trade. Most importantly, you will conserve your capital.

Don’t bring band-aids to the trading desk. Leave them at home. This goes for systems traders and investors also.