Diversified Trend Trading Approach

Yep. I am just hanging on still short on USDCAD and about to be nailed where you have your trailing stop. My pending long is at 1.28531 at the moment.

Nice trade on AUDNZD. Lookin' good :-)

Nice entry setup on GBPAUD mate with good short term momentum and solid longer term momentum as well. I wish that was on my current watchlist. :-)

Good point mate. It obviously worked for gold. That's on its way to hell :-)

Yep. It really is that simple. As Clenow frequently stated, the key to the gravy train is a very simple robust trade plan offering small alpha but with lot's of diversification. Curve fit solutions and overthinking are our ultimate enemy.

We are on the same page with USD CHF

for the last two of my trades,i am making a naïve and stupid mistake,i enter on reversal zone and I am not in habit of closing the trade,when I ralize it is already too late but good thing is that I have mini lots.

Again the subject..... what if nobody understands what we write here?????

https://www.lewrockwell.com/2015/09/...on-of-america/

I don't post much here, but I read this everyday (almost) and appreciate all of it (including the tunes!). One of my favorite threads actually...

Cheers NL. :-)

That's a freaky concept. I am now just wondering whether anyone at all understands what 'freaky' means....and the more I look at the word 'freaky'...the more it doesn't make sense. You are doing things to my head R :-)

Supplementing your Portfolio with 'Rainy Day Trades'.

In addition to the the 'day to day strategies' we deploy to manage risk (when risk is unconstrained) such as the techniques described in this thread, sometimes the market presents an opportunity where you can park a small portion of your capital towards what I refer to as 'rainy day' trades. This is where the reality departs from gambling theory given the imperfections of a 'real' market and you can position yourself to exploit 'real' opportunities with finite risk exposure.

I will spend the next few posts outlining some opportunities that may offer potential to boost your overall performance returns.

For example, as you study the nature of a diversified portfolio across asset classes you realise that when equities are reaching their historical highs, given the negatively correlated relationship with commodities, expect to see commodities reaching their historical lows.

The following monthly charts demonstrate what I am talking about.

This is where we are at with the S&P500 currently. Who knows when the bull run will end....but what at least is clear is that we are at historical highs and when the ***** hits the fans there will be an exodus of investors looking to park their money elsewhere. A large portion of this exodus typically ends up in commodities.



Here are some examples of where some opportunities exist with commodities and a demonstration of how commodities are negatively correlated with the equities market.

Natural Gas


Crude Oil


Wheat

Attached Image (click to enlarge)

Corn


Sugar



Now the reason that I have thrown so many examples above of commodities trading near their historical lows is:
1. To demonstrate the negatively correlated nature of commodities to equities (eg. S&P500 index). When equities experience a bull run, commodities experience a bear run and vice versa. This is a well known relationship which portfolio managers exploit;
2. To demonstrate that this is a natural cycle across a broad range of commodities and does not mean that any of these commodities will fall to having absolutely no value (eg. $0). For example, unlike individual stocks which can and do fall to zero, For a commodity, when prices get too low, production winds back to reduce supply to allow for prices to rise over time. This is how commodity producers such as oil producers etc. address low prices....through managing available supply through production measures.

Remember also that we can exploit the relationship when Indices (not individual stocks) reach their historical lows and traditionally commodities reach their historic highs.

So now that we can see that a rare opportunity presents itself in the current market environment, what do we do to capitalise on this exploitable opportunity with managed risk?

In these historically rare instances, this is where you need available capital as the markets in this condition provide a capped risk opportunity. The capped risk level is at $0 value of any commodity. What I mean by this is that your downside risk under a long only strategy is finite at $0 whereas your upside profit potential is potentially infinite.

You remember when we said to limit your downside risk and let your profits run....well this is an extreme example of an opportunity that presents itself once in a while that represents a 'no-brainer' opportunity for those that are patient and can absorb the holding costs of waiting for a potential outcome to occur.

In my next post I will lay out a game plan for Natural Gas which provides a 'rainy day' trade to supplement the portfolio. But before I do.........it's time to get funky :-)

Supplementing your Portfolio with 'Rainy Day Trades'......continued

So here is the game plan for Natural Gas

1. You have say $200K sitting aimlessly in a bank which you want to exploit for a fixed risk opportunity;
2. You look for a brokerage that offers CFD's on commodities as you want to avoid the tedium of costs of rolling contracts;
3. You look for brokerages that offer relatively low holding costs on commodities as these can build up with large position sizing;
4. You establish an aggressive averaging down grid whose maximum risk exposure at a future value of $0 is less than your available capital;
5. You establish a moderate profit target on your commencement entry position;
6. You establish a wicked profit target that is only a fraction of the historical range of that instrument to realistically achieve your target when the equities take a nose dive;
7. You monitor holding costs to ensure that they don't get out of hand ; and
8. You sit on your hands waiting for the equities market to collapse.

I use a spreadsheet to calculate my risk exposure and profit potential to ensure that all the boxes are ticked. For example currently Natural Gas is sitting at it's historical lows (refer to chart on prior post) at approx $2.95.

Enter that value into your spreadsheet to calculate your full exposure.

From the table above you can see that at current levels of a price of 2.95 when applying this active aggressive averaging down technique, your maximum risk exposure (excluding holding costs and commissions) is $191,750 which is within the tolerance levels of a worst case scenario where Natural Gas reaches no value. Now remember that this eventuality is very unlikely.......Ok I will say it.......WILL NEVER OCCUR IN OUR LIFETIMES. That's a bold statement...but just think about it and I will let you be the judge. Having a finite threshold at $0 also ensures that you will always have sufficient margin to cover any eventuality.

So now let's run a scenario going back to late 2000 when prices were also at these historically low levels prior to the route in 2002 for the S&P500 headed.

Here is how it unfolded and how we could capitalise on the market route in equities. Keep this in the back of your mind today given where equities and commodities currently sit in terms of relative value.

We were a bit late to the table in that that we were well above the recent low of 1226.00 of 1994...but current price was still comfortably below our maximum risk threshold of $200K......

So we grew some balls.....got aggressive and decided to play this strategy with $200K that was sitting idly in our bank accounts.

On 22 October 1999 price was hovering at a low of approx 3.00. Things were looking good for a nice powerful compression entry where we could load up in position sizing before the anticipated long explosion.

Our proposed entry was 2.90. Did this meet our maximum risk tolerance conditions? Yep. Our max risk position if price went to 0.00 was ($188,500) which is within our max capital available of $200K. This protects us from any adverse event...even a margin call (you need to check this against your brokers margin requirement).



We placed our pending buy limit orders for our spreadsheet grid and waited to see what unfolded.

Here is the result.





Within a year, equities collapsed and commodities began their bullish run and we had exploited this opportunity with an approximate 36% return of our capital...with no restless nights or ulcers. Now this is actually a sad story as this is just how the trade turned out. If we had experienced further downside on commencement to a level 3 condition, then our return would have been 268.3% over the same period.....but you can't win them all.

Now in the context of the historic range of price movement of Natural Gas....was our profit target realistic and achievable? Yep....but I will let you be the judge if you examine the context of historic range below.



Was it a good bet? I think so and for the more aggressive types out there who might want to follow a principle of grid trading or more excessive leverage...then whatever floats your boat provided you are fully aware of the potential downside.

Now of course there are different outcomes possible to that stated above....but the general principle should give you some ideas on how to exploit these golden moment opportunities that occasionally pop up with the markets.

Some things to consider:
1. Never ever ever play this strategy short. Only long at around historical lows. If you play a short strategy like this when the market is at it's historic high your downside risk exposure is potentially unlimited and you are in the world of a pure Martingale progression. Don't say I didn't warn you.
2. You need to be prepared to utilise all your available idle capital as you can never predict how these events will play out;
3. You need to factor in the holding costs because you can be sitting in the doldrums for extensive periods. The reasons we exploit this opportunity at historical lows however is that the prospects of upside opportunity exceeds the prospect of downside risk;
4. Make sure you apply your mathematics correctly and understand your maximum risk exposure.....mistakes under leverage send you to the grave-yard early.
5. While a Martingale progression to position sizing is applied....this is not a true Martingale as downside risk is constrained.
6. Your primary trading game is your diversified portfolio trading such as the EDTT...this technique is just a supplemental game to make hay when the sun shines with idle cash doing nothing great at the bank.
7. These opportunities only occur once in a while....so you need to take action to exploit them as opposed to dream about them as I tend to do. :-)

So where are we now with Natural Gas?....well we are in the zone of exploitable opportunities. Are you getting excited yet? Do you see opportunity for that lazy superannuation $ doing nothing spectacular with your fund manager?



Now that is something to mull over when you are digging a groove.

Cheers

C




PS Now for the cluey ones who understand the principles of what I have been talking about and for a little advanced Christmas present. I won't give the game away....but:

1. what if I play a portfolio of commodities which meet the total risk exposure criteria test with a defined total allocation each? What does that do to my risk exposure, income generating frequency and overall potential profitability?
2. what if I commit an aggressive position to a single level and avoid the progression entirely, provided that the maximum risk exposure is known and contained?

........something to keep you up at night crunching. :-)

EDTT - What's Trending

Below are current active trades on EDTT. Those with a timeframe >M30 are legacy trades still running from the old multi-timeframe method.



















......more to come

C

EDTT - What's Trending cont'd....

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What about Gold?.....It just hasn't got enough short term momentum at the moment to get me to pull the trigger finger so I have pushed the pending entry further south. I think I missed this boat.



Aveagreatweekend guys

C

Very interesting thread and trades.

Wonderful read and amazing strategy.

Cheers Blue :-)

Some tunes from my today's Pandora.com listening.

New arrivals. Strange that on lazy Monday: