Martin Kronicle

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There have been a lot of parabolas lately. And if you’ve added to them early on, chances are you’re watching your portfolio rise dramatically. The US Dollar index has been making new lows, and many others such as Sugar, Cotton, and Soybeans have been making multi-year highs.

The risk here is that you become hypnotized by the gigantic unrealized gains you’ve attained in your portfolio: they have come with seemingly great ease. Parabolas cannot continue to grow indefinitely. Over my career, I have seen markets reverse course with no warning.

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If you’re fully loaded and haven’t taken some profits by now, you might consider putting stops in for each of your positions. By that I mean offset each position 100%. If you have 1 or 30 gold contracts, put your stop in for the full position. When the reversal hits, it will be bloody.

I’ve been there and it’s very frustrating. Since I don’t like that feeling, now I puke out the entire portfolio at the same time. This is a discretionary trade for me, but you can program your model to measure the daily drawdown and base your offsetting trades on that if you want. You can always get back in.

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If the news is especially shocking, you’ll likely see all the trends reverse on the same day. That gives rise to my recommendation to purge your entire portfolio. In doing so, you’ll keep more of the profits. Otherwise, you’ll be sitting there feeling like an idiot because just days ago your account was significantly higher, and your overall RoR was higher too. Not anymore…

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I don’t believe that parabolas mean “bubbles,” per se. I think what you see in many of the charts here are “panicked buyers” as much as anything else and traders responding to very tight supply.

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When one of your stops gets hit, you can offset the other positions at market prices even if those stops have not gotten hit yet. Don’t get stuck daydreaming about how great you are. You need to keep those gains. Especially near the end of a month or quarter like we are now.

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* the green line represents the 15 year central tendency of 20 day historical volatility (1995-2009)
* the blue lines represent 1 standard deviation from the central tendency
* the red line represents the implied volatility
* the magenta line represents the current markets 20 day historical volatility
* The daily chart above displays the average historical volatility (and one standard deviation in each direction)

At any given point on this line, volatility has been found above half the time, and below half the time, on average. Historical volatility has traditionally been found between the two outside bands 68% of the time. When overlaid with current implied volatility we are able to distinguish those levels that fall outside the historical norm, creating a reference point regarding current option market prices.

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This chart represents the current market.

This report is always available gratis to MRCI Online subscribers & free trial guests. I don’t have a financial relationship with MRCI to disclose.

In this video, Michael Martin takes a look at how a few different trading systems would be long December Gold using the new FutureSource charting capabilities. Click the lower-right corner to enlarge the video.

The WSJ ran an article called Traders Who Skip Most of the Day on Friday and made it seem like it was a novelty. Hmmm?

I think there are many more traders trading exclusively during the Open/Close than the WSJ would know or let on. The Open and the Close are the two most liquid times of the day.

You can start at 8 am ET and work 2 hours. Put your stops in and come back at 2 or 3 pm ET. That would give you 4-5 hours during the day. This is especially true for an intermediate-term or long-term trend follower. Despite what you might think, watching your screen all day has no effect on the securities you trade or are looking to trade. The market is going to go where it’s going to go.

Early in my career when my cash-flow was tight, I relied solely on EOD (end of day) data. I was up over 50% for the year. You can still do that today unless you have a judge in your head that won’t allow you to do it.

When I lived in Manhattan I didn’t do any touristy things. I had gotten them out of my system when I was much younger because I had lived only about 1 hour north of the city then. Yet, several times a year I’d make my way up to the observation deck of the WTC. You were so high up, I swear you could see the horizon fall away from you as if you could see the earth begin to curve down. I can still see that image in my mind.

When I was about 12 years old, my uncle John took my mother, my sister, and me to Windows on the World for lunch. The restaurant was still pretty new then and the whole WTC was less than 10 years old. I can remember looking out the window to the streets below and thinking that the New Yorkers walking around looked smaller than ants and the taxis looked smaller than my MatchBox cars.

Many years later when I was well into my trading career, I’d meet my friends in lower Manhattan for lunch or after work for drinks. One day I was going to have a sushi lunch with my childhood friend TJ who had a large brokerage operation on the floor of the NYMEX. The day was very overcast and there were some low-hanging clouds. Not low like fog, but low so that they appeared to blanket Manhattan.

While I was waiting for TJ outside, I looked up the side of the North Tower — which up close was a massive and hulking presence — and it just disappeared into the sky. It was not going to take any sh*t from any low hanging clouds. I couldn’t see the antenna over the edge of the roof and I remembered being in awe of the building, the people who built it, the folks who worked there. And I remember it occurring to me that I was fairly insignificant in the whole scheme of things.