A few days ago I posted about my personal commitment to simply trade what I’ve tested this year.  Well, these past two weeks have been a great testament to that process and the pay off has been pretty solid.  Currently, I’ve only spent enough time testing the corn futures market to be comfortable allocating capital against it. If you follow any of the commodity markets, you’d know that these last few weeks have presented amazing volatility and irrational trading according to some of the respected commentators in the grains space.

Last year, I’m pretty sure that I would have walked away from this type of market with a nice big loss.  My system would have performed really well, and I would have added enough horrible trades in to lose a bunch of money.  These would have mostly been entered very late at night, in a thin session and they would have all moved against me.  I would be angry and swear that I wouldn’t do it again.

Well, this year, I didn’t do it again.  I stuck to my guns and just traded what I’ve spent time testing.  It worked like a charm and kept me out of some of the insane volatility while basically nailing the drops over and over again.  I only had 7 positions triggered and 5 of them were winners.  In a market like this, I can’t ask for anything else.  That is a net of +35 points on each contract traded, not to bad over a two week period if I do say so myself.

Let’s just hope that the rest of the year continues to provide solid returns.  I’m pretty darn confident in the system I’ve developed and I’m looking forward to branching out into a few other grain products in the future as I have time to back test and ensure the system ports over cleanly.

These last couple of years have been quite a learning process for me.  I’ve been fortunate enough to have the opportunity to complete my MBA (I’ll be done in two weeks) at Kellogg, experience the birth of two fantastic little boys, enjoy a great job with a fantastic company and grow a lot as a trader in the process.

Given the myriad of other things that I am doing on a daily basis, I obviously cannot commit the time and effort to trading that a lot of others do.  I don’t have the time to stare at a trading screen all day long, and quite frankly I don’t trade a large enough account to make enough money to even consider it!  However… I really enjoy being a participant in the market and generating some spending cash.

With some basic constraints around what I can and cannot do, I’ve turned to very technical, very system driven trading.  I’ve dabbled with a few newsletter services (not a fan), I’ve played with options quite a bit but I’ve really found a home in commodity futures.  My trading method is horribly simple, just follow the trend.  I use a combination of some very basic indicators to get into a positions and as long as I trade without emotion, I’ve done pretty well!

My problem is that I get in my own way!  I can’t tell you how may times I’ve given away everything that my simple system has earned in a series of gut feel trades.  It’s as though I start to get overconfident about my personal ability and I try to time the market rather than simply go along for a the ride.  To make matters worse, I’ve noticed that I tend to trade in size on these horrible gut feel trades and blow up my account in spectacular fashion really quickly!  I’ve managed to remain profitable, but I’ve given back far too much money by letting my emotions drive my trades rather than analytics.

This year, I’ve committed to knock it off.  I’m only trading things that I’ve tested successfully.  It isn’t quite a full quarter of the year in, but the results are awesome so far.  It’s great to just set it and forget it based upon my rules, in fact if the year continues to be this solid I will likely transition to a fully automated system sometime this year for my futures positions.  I’ve spent a good amount of time developing and testing this little system, and it works really well.  This year I’m going to take advantage of that.

I decided to hedge off both the IWM and SPY condors today to ensure profitability should we get a substantial drop over the weekend.  Upside risk is negligible at this time, and quite frankly the hedge on IWM wasn’t really needed yet…- I’m simply playing it safe.

The trades are as follows:

• BOT 25 SPY 100 MAY 10 108 PUT @ 1.90
• BOT 50 IWM 100 MAY 10 59 PUT @ .59

The SPY hedge is a little late as my existing short strike on the SPY trade is 112, I should have hedged this off on Monday and Tuesday when I was working the rest of my real money accounts.  That was my mistake.  No worries though, these hedges will protect from downside risk, and worst case the SPY trade turns out to be a slight loser.  Also, the strike I used may have been a touch to close, a further OTM option would have provided possibly more protection due to a larger volume of contracts for the same outlay.

The IWM hedge is really to protect from a MAJOR market collapse in the next few days.  The short strikes are at 63 for this condor, so there isn’t a ton of risk here with the IWM currently at about 65.5 – however there is enough risk that I don’t want to be unprotected!  Time decay is going to start to pick up rapidly in the next week or so, so these hedges will be very short term.

My personal opinion is that we are going to see continued weakness in the market. There will likely be a rally in the next few trading days to consolidate the losses, however I would not be at all surprised to see the Dow, S&P and Nasdaq all down again next week and throughout the month. Greece is a power-keg that is ready to explode and the Euro zone is going to be in big trouble when/if that happens.  The old adage of sell in May and go away is really holding true!

From the WSJ:

Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.

A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.

After the carnage of Lehman and Bear is anyone surprised that major banks are doing everything in their power to manage their perceived risk?  This isn’t nearly as bad was what Lehman was doing, but 42% is a major shift, in fact that would be a material shift of risk in my mind.

Call me crazy, but wouldn’t it be prudent to actually manage the risk rather than attempt to hide it?

A few weeks ago I decided to tweak the papermoney portfolio again.  Rather than going for a bunch of option plays on index products, I wanted to simulate some “money management” via positional plays on individual equities and managing risk via index option plays as needed.  The goal with the portfolio is to earn roughly 2-4 percent a month and compound the gains throughout the year.

E-House Holdings

It looks like I was stopped out of E-House holdings today (EJ – chart on right).  This is a Chinese real estate firm that was (and remains) very interesting.  I purchased the shares a little too high, so I’ve paid for that mistake.  I am currently short 5 Calls @ 22.5 and I’m going to keep the calls as I’m a buyer if we can break out to above the 21/22 level and will cover those short calls very quickly with stock.

If you take a look at the chart, you can see that on a longer term basis, EJ is in no-mans land.  There is no good reason to buy here, however I am also a buyer again if we can break the 200 day EMA so I’m putting in an order to sell puts at @15  for a reasonable credit to possibly get put into the position.

Buy selling covered calls and shorting puts to buy stock I am constantly generating income in the portfolio.

A few days ago I wrote about my internal struggles in determining what is the best allocation of funds for my 401(k).  Well, I’ve gone back and forth, again and again trying to figure out the best move. The biggest constraint is simply the funds available in my 401(k).  I’m not horribly comfortable throwing 100% of my money in a single fund – I just don’t have a lot of options!

So, here is what I’ve decided to do.  Your comments are always welcomed!

• 75% of my 401(k) is now locked up in the Pimco Total Return Admin – PTRAX Fund.  The fund has performed well over its life, and should provide stable returns to the 401(k) during this upcoming period of what I believe will be market non-performance.
• 25% of my 401(k) is allocated across a series of different funds that have exposure to domestic and international stocks.

As with all projections mine are bound to be wrong.  Timing, size of the move, all of these things will be wrong in some respect.  I could be totally wrong and the market could take off like crazy!  Who knows.

Here is the brass tacks of my logic.  PTRAX has performed consistently since its inception.  It continually provides returns year over year.  If I am right and the market absolutely falls apart, it is possible that PTRAX will suffer some losses, but they should be very small compared to the overall stock market.  If I am totally wrong and the market rips up from here, well… I’ll still make money.  Sure, it will be a bit less than a fully setup stock portfolio, but it will still provide very nice returns overall.

That is pretty much it, should be interesting to see what happens.

If things begin to slide as I expect – you can be sure that I’ll be looking to throw even more money at PTRAX.  The other options I have are pretty much useless, so who knows.  If you are a seller of PTRAX, I have a large block buy coming in

Lately I’ve been pondering the best way to “manage” my money long term.  Specifically I’ve been mulling over different options for my company 401(k) and my other retirement accounts.

These accounts are of course longer term accounts that are earmarked for living expenses later in life.  As such, my goals with them are to have some stability in the fact there there will be money there, while earning as much as possible so that my family is well taken care of later in life.  Ideally, these accounts would grow to a size that enables my wife and I to retire comfortably while also providing future income for my children and down the generational tree.

So… The question becomes, what is the best way to manage this cash?

The bulk of the money is in a 401(k) account that has specific rules and regulations regarding deposits, withdrawals, transactions and investment vehicles.  Quite frankly, it is fairly limited in what can be done.  Hedging is out of the question, shorting is a no-no, individual issues are out of play, and there are only a dozen or so funds that can be used.

I don’t really plan on coming to an answer or recommendation on this post, I’m really just thinking out loud.  If you have some thoughts on the topic, I’d love to hear them!

Here are my thoughts and current concerns

I am not a money manager.  When I trade, I am a speculator.  Plain and simple.  I look for short to medium term (a few days) setups and I trade them.  This is not how you manage money longer term.

My overall market directional calls have been pretty solid for longer term plays.  Currently, I’m very concerned about the strong possibility of a long bear market, or at best, years and years of chop.  Given this, I don’t think there is much appreciation to be had from the stock market in terms of raw percentage gains.  I’m also a bit concerned about the possibility of a strong inflationary enviornment in the next three-seven years, if that happens, nominal prices will rise quickly and I’d like to protect my money from this increase.

If I am right directionally on the market and we move down, then having strong exposure to equities is not really the best place to be!  Given that I cannot hedge properly in these accounts, it is very difficult to insure my gains from possible collapse.  Without the ability to hedge, the only option that I can think of is to simply reduce my exposure.

With that line of thought, I took a look at my options.  Cash or bonds.  That is about it.  Cash is definatley out of the question for a large part of the portfolio – over the next 30 years I’m pretty sure about one thing, cash will lose value – period.  So, let’s talk about bonds.  Well, there are two options that are avaiable to me here, the best one is a fund that has returned about 7.25% over its life, and recently has returned about 5% a year.

Consistent returns, or playing the market…

Well, 5-7% a year isn’t horrible, but it isn’t going to rock my retirement world either! Let’s get one thing clear, I do not micromanage this account.  Nor do I want to.  I will make about 4 adjustments a year.  Primarily these will be total portfolio re -balance adjustments to line things up with future expectations.  If I don’t need to make any changes to my fund selection, I’ll just re-balance things to get back in line with my investment allocation.

So.. Given that I’m not going to try and time the market, and I am definatley not going to be trading this account; what is the best allocation method for the investments?

I could do something simple like a 50/50 split.  50% locked up in a reasonably stable vehicle like that bond fund, the other 50% spread out across an array of other vehicles matched against macro economic conditions, fund performance, management etc… This provides a nice way to protect gains when I rebalance, and it also protects capital if the market collapses.

There are hundreds of other options, each of which have plusses and minuses.  This post is getting wordy, so I’m going to call it quits for the moment, and I’ll revisit shortly.  If you have any thoughts, I’d love to hear them.

It’s been a while since my last post.  Lately, I’ve tweaked my methods to become more consistent in my profits.  Rather than throwing down positions that range from speculative options plays to futures scalping, I’ve focused in on a single market with a single system.

So far the results have been pretty good.  I’ve been tweaking things slightly to generate additional profits while minimizing losses all the while keeping it as simple as possible.  Curve fitting a system with tons of rules never works in the long run.

It’s been difficult to simply trust the system and follow the entries by the book.  That is of course until I look at the statistics from trading “by the book” vs. trading by my gut.  Funny enough, when I trade by the book, I do very well.  Once I start trading by my gut, I end up losing money.

Anyhow, make your rules and stick with them.  If your rules and your system are solid, you should do very well.

Well, it has been quite some time since my last post.  I haven’t dropped off the face of the planet, I’ve just been busy with school, work, family, golf, trading and working out.

This market has been really, really tough.  There have been times that my account has been a rocket ship, moving up with reckless abandon and then of course other times getting just flat out crushed.  I’ve really had to make some tweaks to how I trade in order to manage this market.

I’ve moved away from options, and exclusively to futures. I’m trading mainly on tick charts, very, very short term in and out scalps.  I have about 5 markets that I’m watching and I am trading one setup.  If I don’t find the setup when I scan the markets, I don’t trade them.  It takes mes about 30 seconds to scan the markets, and then I’m back to whatever I was doing before.

If I find my setup, I put in the limit order (or stop sell/buy) with an OCO bracket and go back to what I was doing.  My profitability has gone way up. The setups are clean, and trading these way keeps me out of the markets when they are not trending.  I had been trying to scalp channels, and choppy markets.  It was profitable, but also very costly when I was wrong.

Simple setups, difficult markets = profits.

The best part about these setups is that I can do the market scan so quickly that I am able to scan often with basically zero interuption to the rest of my day.

Possibly, and as a result I sold my papermoney calls on Friday.  I’m still holding the SKF and SPY puts. I’ve updated the papermoney tables with the trade.  Sorry for the weak analysis over the past week or so.  I’m swamped with babysitting our son, and keeping up with school work.  I’ll try to get some reasonable charts up on the site in a bit.  I could throw up charts with fibs and lines all over them, I’d just prefer to have some thoughtful analysis on them.

Good luck!