FIGURE 10.29 10 Year Bonds
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Nothing much happened other than small losses and small profits all of the rest of May until mid-June. I had two trades, though, that returned in the mid-2 percent range. On June 6, 2010, I had a signal to go long soymeal again. I entered the breakout trade at 278.5. I rode this trade until October 10, 2010. I exited at a price of 310.4 on a one-lot for a profit of 2.1 percent per unit or $3,115 per unit. On June 17, 2010, I had a signal to enter the Eurodollar interest rate contract. Due to position sizing I was able to enter four contracts for the same risk as one contract. When the trade worked this benefited me. I entered the Eurodollar at 98.615 long. The trade carried on till September 8, 2010, and resulted in a 2.3 percent return per unit or $3,250.
Afterwards I had a small loss on silver of approximately –.7 percent or a loss of –$1,050 per contract. No big shakes. I hit a nice single on the Japanese yen on June 24, 2010. I entered long at 113.09 and followed the trade via the average true range trailing stop on September 16, 2010. This trade resulted in a profit of 1.8 percent per contract per unit or $2,600. In this inning of baseball trend following I had some singles, which offset all the various strikeouts and losses. These small singles make up for the aggravation of all the losses. I also had some other nice percentage winners, which started to help me. This is in complete contradiction to the upcoming year, 2011, in which I did not have that many trades work, rather a lot of small losses and whipsaws so my results were negatively impacted. You can compare the two years to understand. It really all boils down to what the markets give us, and they can be very stingy some years.
July was full of one loss after the next. Actually, five losses in a row. The reason I wanted to include this trade diary is so that you will see in reality that trades do not have to work and that you will have multiple times when trade after trade does not work.
Time to quit, nope. The next trade was like a fisherman catching Moby Dick. Before that thought my emotions were fully tested. I had a small loss on feeder cattle, –.4 percent, and soybean oil was a loss of –1 percent. Natural gas resulted in a loss of –.7 percent, and a lovely one after the next loss in lean hogs, each –.8 percent. So for all of this fun I lost 3.7 percent. One step backward and a lot of steps forward.
I was on vacation with my family, got up at my usual 5 a.m., and downloaded my data. I entered my orders and went back to vacation. I had put in an order to buy cotton. I did not know anything special nor am I an expert in cotton. I did not check the weather forecast for wherever cotton is grown. Just took the breakout long like all the other trades I take, saying to myself, “How much is this going to cost me to see if it works?” I entered on August 2, 2010, and rode this trend via my trailing average range stop until November 22, 2010. I was in the same trade as my Diversified proprietary account. Thank God. Many times the two are in different trades due to the way they are built. The cotton trade worked past my wildest expectations (actually, I did not have any). The cotton trade resulted in a 14.5 percent return per contract per unit or $21,370 per contract per unit. That was the fantastic news; however, as usual Mr. Murphy (Murphy's Law) was around. I got taken out on a retracement. Ironically, the cotton trade took me out via my trailing stop and continued on its upward path. I did not feel betrayed. I followed my plan to the absolute degree. I did not feel upset that I was taken out by my trailing stop. My trailing stop has protected me when trades have not worked, and when trades do work the trailing stop gives them enough room to run. On a back-adjusted chart the highs were approximately 112 and I was exited two bars before the pivot low of approximately 71 before the trend retraced and ran up to about 173. This is trading. You will never get out at the top. The greater the move, either long or short, there will be greater volatility as others start to jump in on these trends. One does not want to jump in on markets that are volatile. Some of the best trades I have ever had over the years started in quiet markets. You just never know what trades will work and which ones will not.
August had the typical small losing trades; however, I stumbled onto a gold trade on August 13, 2010. I entered a long breakout at 1,232.90 and was in the trade until the trailing stop took me out on November 16, 2010. This trade ended up profiting 2.7 percent per contract per unit or $4,038 per contract per unit. This helped to offset those nagging small losses.
I had a small loss on feeder cattle, which resulted in a small loss of –.8 percent.
Moby Dick had a brother. It was called silver. I cannot say it enough times. You need to make yourself available for trades to occur. You never know when or in what market you will make money (as well as lose money). Silver just so happened to be that market. I entered on August 25, 2010, and what enhanced my return was that for the same risk I was able to put on two contracts. This underscores the power of position sizing. Position sizing is such an important tool with which to compound money. It is so aptly demonstrated in this trade with silver. I entered the two lots at a price (back adjusted) of 1,885. I was patient and let the trade run its course. On January 7, 2011, I had a signal to exit via the trailing average true range stop at 285,410. This trade resulted in a 12.4 percent return for the unit or $19,232. If I had only taken one trade as in the concept of fixed size I would have left a lot of money on the table. This underscores the reality and necessity to trade via percentages. When you trade via percentages it also helps to get out of the money thought process. One should trade for percentage returns, not money. It seems a lot worse or better when you look at a loss via dollar terms. To me, trend following is a game and we need to think of it as a game in which we try to compound money (Figure 10.30).
FIGURE 10.30 Silver
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The trends were on a roll (however, as usual they would be short lived and the ugly drawdowns would soon start). On September 13, 2010, I had a breakout signal that the S&P 500 was one of the strongest on a nominal basis of the markets I was looking at. I went long at 1,081.5 and was in this trade until March 10, 2011, when I was taken out via my trailing stop. This trade resulted in a 5.9 percent profit per contract per unit or $9,125 per contract per unit. On September 24, 2010, I had a breakout long sugar trade. Sugar was one of the strongest markets I was looking at. I want to buy the strongest if I can put on a low-risk bet and sell the weakest if I can put on a low-risk bet. The low-risk bet is comparing the initial risk on the trade from the X-day breakout to the Y-day low. I look at my core equity (the amount of money I have in my account, not including open trade equity) and risk 1.25 percent of my account size. It is not as if any trade is low risk. Every day has risk and there are times my anticipated risk level is exceeded. I entered sugar at 17.22 and stayed in the trade via the trailing stop until November 12, 2010, at 21.09 (back adjusted). This trade exemplifies the tenet of good trend following: Let your profits run. There are countless trades in which I also followed the good tenet of trend following: Cut your losses short. It is almost funny to a perverted degree. I followed my rules and lost money. This is what makes trend following so hard for most people to do. The sugar trade netted me 2.6 percent per contract per unit or $4,259 per contract per unit.
For the rest of the months of 2010 I had many small losses and small profits. However, what is shocking (except I know this happens much more than we like) is that I had nine trades in a row that did not work. My equity peak of 2010 would not be seen for a long time. Currently I am still waiting to recover back to these levels. The importance of trying to risk small percentages of one's account is exemplified in the December 2010 and January 2011 periods. If I had taken bigger risks I could have easily been down in excess of 20 percent in one month. I try not to look at the upside or how much I can make. I look at how much I might lose. I attempt to mitigate the losses, but as in trading the only guarantee is uncertainty.
Chronicling these trades that did not work gives us a good id
ea of what to expect in your own personal trading. Seeing nine trades in a row is reality. Trend following is not “easy.”
On December 17, 2010, the Canadian dollar was one of the strongest markets on a nominal basis compared to the basket of markets I trade. I entered a long trade at 9,841(back adjusted), and within a few short days on December 21, 2010, my trailing average true range stop rescued me from a bigger loss. I exited at 9,670 for a loss of –.9 percent per contract per unit or –$1,785 per contract per unit. This was loss one. There were eight more to go. On December 27, 2010, I had a signal that natural gas was one of the weakest markets and a signal to sell one contract per unit. I sold short natural gas at 4.97 and again in a few short days I was saved by my trailing stop. I exited on December 31, 2010, at 5.30 for a loss of –.9 percent loss per unit or –$1,800. I just kept on swinging on the upcoming trades. I had a signal to try to buy crude oil. At times it might seem this is not the strongest market but in nominal terms it is. It might be the best in general but not highly trending at times for a long or the worst in general for times for a short. I entered the long crude breakout trade at 100.75 on January 30, 2010, and by January 6, 2011, the fun was over and I had a loss of –.8 percent per contract or –$1,638. The Eurodollar was weakening and was the weakest on a nominal basis comparing all the markets I trade. I went short at 130.63 on January 6, 2011. This trade did not last a long time whatsoever. I exited via my trailing average true range stop on January 14, 2011. This loss was another –.9 percent or –$1,831 per contract. The losses were adding up; however, my frustration level was not affected. I have been in this story: No one ever promised me any trade had to work. I was thinking, however, that it was about time for a trade to work. However, that was not the case. I still had another five more losses to go through. On January 11, 2011, I had another bite of the apple. I had a signal to buy the Canadian dollar at 99.60. I was in this trade until January 31, 2011. This was a loss of –.6 percent or –$1,205. At this point most would start questioning their trading system or start tinkering. This would be the worst thing one could do. What was transpiring was no six sigma event. It has happened in the past and will happen in the future regardless of the meaning we put on it.
Being consistent or a glutton for punishment I had another try at crude. I had a buy signal on January 12, 2011, at 101.35. Again, another loss. I exited quickly in order to keep my losses small and was out via my trailing average true range stop on January 20, 2011. This loss was –.9 percent or $1,888 per contract per unit. Three more losses to come, but who is counting? On January 18, 2011, I had a purchase of soymeal at 400.20. This trade also did not work. I was in this trade a little more time, however. I exited the loss on February 15, 2011, at 385.50 for a loss of –.7 percent per contract per unit or –$1,515. On February 1, 2011, I took the long breakout signal for soybean oil. Again this trade did not work. The loss on this trade was –.7 percent or –$1,425 per contract per unit. One last trade and I was starting year 2011 off pretty much the way it ended for the year, ugh. This is reality and did not curb my passion or my enthusiasm for trading. I know this is expected and there was no surprise. The problem is for people who have unrealistic expectations. They are hurt by periods like this and cut themselves off from the good periods. The reason I am highlighting nine losses in a row is to accentuate the fact that it will happen in the future and might even be worse. This way you are prepared for this. It is not a shock. This way hopefully you will stay in the marathon of trading.
My last lovely loss in my series of nine trades that did not work was wheat. I went long wheat on February 2,2011, as it was one of the strongest markets and it was a breakout. I entered at 1,025.25 and exited via my trailing average true range stop. I exited on February 18, 2011, for a loss of –.9 percent or –$1,775 per unit. By the beginning of February I had a slight respite from consistent losses. I had a small natural gas trade that worked for +.8 percent. I survived the deluge and finally stumbled into a nice trade. I was down approximately 7–8 percent from the beginning of the year in a relatively short period of time. This was slightly reversed by a nice silver trade. I entered the silver trade with a trend breakout on February 9, 2011, at a price of 30.50. I was in this trade until it imploded on May 4, 2011. Silver had gotten to approximately 50.00 and then completely fell out of bed. Within a short couple of days I was out at 39.40. That was a lot to give back, but that is reality. The silver trade netted 4.3 percent or $8,826 per contract per unit (see Figure 10.30). This was a far cry from the open trade equity I had with it, but so is trading. There is no one to gripe to. This is why I write.
The small losses continued in February 2011. I had a loss of –.5 percent on a Canadian dollar trade. There was a feeder cattle loss of –.5 percent, lean hog –.6 percent, and Australian dollar with a loss of –.9 percent. Four trades in a loss until I stumbled onto a gold trade. Gold was purchased on February 23, 2011, at 1,417.20. Due to position sizing I was able to put on two contracts for the same risk as if it were a one-lot. This magnified my profit for the same small percentage anticipated risk of 1.25 percent. Gold continued in the trend until June 24, 2011. I exited when it hit my trailing average true range stop at 1,522.11. This trade resulted in a 3.4 percent profit per contract per unit or $6,836 per contract per unit. Just to clarify, per unit is referring to the model size of $150,000 per unit.
March was full of more small losses. Seven trades in a row did not work. One of the worst was–1.7 percent. This loss exceeded my anticipated losses. This will happen while you trade. The Eurodollar started out as if it would work. It had three nice up days in a row and then completely fell out of bed. I entered on March 11, 2011, and due to this fast retracement I was exited by March 28, 2011. This trade resulted in a loss of –$3,438 of my account (see Figure 10.31).
FIGURE 10.31 Eurodollar
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I had one trade that worked after these batch of relatively small losses. The Australian dollar trade of April 1, 2011, lasted until May 23, 2011. It was not a big profit at all. It was a welcome break after a string of trades that did not work. The Australian trade resulted in a 1.1 percent profit or $2,175 per contract per unit. No big shakes. In April and May I can easily say nothing happened. I had several more small losses and several small profits. They pretty much cancelled out each other. Almost half a year went by and pretty much nothing positive to say about my returns.
Sugar offered some relief. On June 3,2011, I entered a long trend breakout at 21.02. This long trade carried on until August 3, 2011. The trade resulted in +2.8 percent or $5,839 per unit. The rest of June was more of nothing happening. July looked like things might start turning around for the year. Trading is like football. All that really counts is what happens in the fourth quarter. The team can struggle for the whole game and in the fourth quarter win the game. There have been years like that in trading. On July 11, 2011, I entered a long gold trade at 1,561.2 with a trend breakout. I was in this trade until September 22, 2011. This trade resulted in a 3.2 percent profit per contract per unit or $6,780 (see Figure 10.32).
FIGURE 10.32 Gold
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On the same day of entry of gold I had an entry on the Japanese yen. The yen had a long breakout trade at 125.72. This trade lasted until September 6,2011. This yen trade resulted in a 2.1 percent profit per contract per unit or $4,313. The next day, July 12, 2011, I had a 10-year bond trade. The 10-year bond broke out to the upside and continued until I was stopped out on October 7, 2011. This trade resulted in a profit of 2.5 percent or $5,206 per contract per unit. Finally I thought I was back in the saddle and things were turning around. I could not have been more wrong. I had 18 trades not work after this point. Wow, 18 trades did not work. I had somewhat of a respite as I had 10 trades in a row that did not work and one small trade that did work. Then the fun continued; eight more trades did not work. Thank God I managed the risk.
This is all that one can do. The losses were kept small, ranging from –.1 to –1.6 percent. However, losses like this are tough to take. I cannot remember when so many trades did not work. This is the reality and exemplifies why trading can be so hard. At the puke level at which most people would have wanted to quit there was the natural gas trade, which saved some of the year from being a total disaster. I am chuckling when saying a total disaster when the MF Global debacle was closing in. I entered the natural gas short trade on September 16, 2011, and was riding it along. I was able to put on a great size due to position sizing. However, this is the good news. There is bad news. I was in this trade in the thick and the thicker of MF Global and was able to transfer out all my positions the week prior to their collapse. I had updated my data version and I did not realize there was a difference between the natural gas mini contract and the full size. I was trading numerous lots of the mini size natural gas contracts for flexibility as part of my position sizing. I was able to put on more contracts due to position sizing. Again that is good news, but again I have bad news.
The Trend Following Bible Page 22