Will Natural Gas Soar With the Wind in June?

See Jay’s recent post: One More Plunge for Crude Oil?

OK, my last article (Will Natural Gas Break Wind in June?) did sound a little apocalyptic regarding the prospects for natural gas in June. But maybe that did not present the full picture. While that previous article did detail a bearish seasonal period for natural gas starting at the close of trading on June Trading Day #11, very often there is a brief “pop” prior to things taking a turn for the worse.

The Brief Respite

The brief favorable period we will look at now:

*Starts at the end of June Trading Day #8 and;

*Lasts for 3 trading days before things flip to “unfavorable”.

Figure 1 displays the results generated by holding a long position in natural gas futures during this 3-day period since the inception of trading in 1990.1Figure 1 – Long Natural Gas futures June Trading Days #9, 10 and 11

For the record:

*There have been 17 up years and 8 down. 5 of the first 6 years showed a loss. Since then 16 out of 19 years and 10 out of the last 11 have seen a gain registered during this three day trading period.

*The average gain was $2,914

*The average loss was -$1,413

*The largest gain was over $10,000 (2006)

*The largest loss was over -$5,000 (2003)

*13 of the 25 years witnessed a 3-day gain of at least $1,800.

So clearly not for the “faint of heart” nor the “small of trading account.”

Figure 2 displays the year-by-year results

2

Figure 2 – Year-by-Year Results long natural gas futures during “favorable” June period

Combining Bullish and Bearish June Periods for Natural Gas

Now let’s assume a trader held a:

*Long position in natural gas futurse during June Trading Days 9, 10 and 11

*Short position in natural gas futures from the close of June Trading Day #11 through the close of the 14th trading day of July

The cumulative gain for this “long then short” strategy appears in Figure 3.3Figure 3 – Long and Short Periods for Natural Gas combined

The year-by-year results appear in Figure 4.

4

Figure 4 – Yearly results for Long and Short periods for Natural Gas combined

For the record:

*21 years showed a gain (84%)

*4 years showed a loss (16%)

*The average gain was over $7,576

*The average loss was -$1,573

*The largest gain was over $27,000 (2008)

*The largest loss was -$3,790 (2012)

Also for the record, these results include no deductions for slippage, commissions, taxes, etc. and use futures data that I have had sitting on my computer which are assumed to be accurate.

Note too that these results do not take into account the sheer terror that can be associated with holding any position in natural gas futures – even if things are going your way at the moment (trust me on this one) – because this market can be incredibly volatile and can turn on a dime.

Summary

A few notes:

*There clearly seems to be “something anomalous going on” in natural gas in the month of June.

*There is (sadly) no guarantee that these anomolies will play out in June 2015 as they have in the past.

*The last time I wrote about natural gas tendencies in the month of June it ended up being the worst year ever to follow these trends (Still think I am just paranoid when I say “Murphy hate me”?).  So I think we all know what that means.

*Trading natural gas futures is absolutely, positively “not for everyone.”

Thanks to the advent of ETFs and options on ETFs there are ways to play these trends without ever trading a futures contract.

I’ll plan on revisiting this topic as the June seasonal time frame draws closer.

Jay Kaeppel

Will Natural Gas Break Wind in June?

See Jay’s recent post: One More Plunge for Crude Oil?

If you are an ardent believer in the phrase “if something looks too good to be true it probably is”, then you’d better brace yourself.  Because a “sure-fire, can’t miss, you can’t lose” thing is on the horizon in natural gas.  Well OK, at least that’s the theory.

A Bearish Seasonal Trend in Natural Gas

The bearish time period in question extends:

a) From the close of trading on the 11th trading day of June (Friday, June 15 in this case)

b) Through the close of the 14th trading day of July (Tuesday, July 21th).

Here is the chronology of natural gas performance during this time period:

*Natural gas futures started trading back in April 1990.  During that year, natural gas lost $790.

*During 1991 and 1992 however, natural gas gained $200 and $1,850, respectively.  Things got “a little worse from there”.

*During the next 19 years, natural gas futures declined during the bearish period described above.  Yes, you read that right – 19 consecutive years.

*Then like I fool I wrote about this trend in early June of 2012. See if you can guess what happened that year? Can you say, “A sharp advance (over $6,000 per futures contract) in the price of natural gas”?  Sure, I knew you could.

*After that humiliation, everyone forgot I mentioned it and things went back to form with natural gas declining in 2013 and getting clobbered in 2014.  So in a nutshell, this period has seen natural gas decline in 21 of the last 22 years.

So for the record, since 1990, natural gas futures during the June TD 11 through the July TD 14 period showed:

-A decline 22 times (88.0% of the time)

-A gain 3 times (12.0% of the time)

-The average declining period was -$5,580

-The average gaining period was +$2,730

The cumulative equity curve generated by holding a long position in natural gas futures only during this time period from 1990 through 2014 appears in Figure 1.2Figure 1 – Cumulative gain from holding a short position in Natural Gas futures during bearish time period (1990-2014)

Figure 2 displays the year-by-year results.

1

Figure 2 – Yearly results from holding a short position in Natural gas futures during bearish period (1990-2014)

Ticker UNG is an ETF that ostensibly tracks the price of natural gas.  UNG started trading in 2007.  Figure 3 displays the net change in price for UNG during the aforementioned bearish period each year.

3

Figure 3 – Percentage gain or loss for ticker UNG during bearish period

Now let’s be honest, that’s a pretty good track record no matter how you cut it.  Of course, that’s the good news.  The bad news is twofold:

1) These historical results in no way “guarantee” that a short position in natural gas during this bearish period this time around will actually make money.

2) I mentioned this trend again.  And of course, you can see in Figure 1 what happened the last time I mentioned this trend…………In the immortal words of Crosby, Stills, Nash & Young – “Paranoia, it strikes deep.”

How to Play This Trend

I will visit this topic when we get a little closer to June 15th.

Jay Kaeppel

 

 

An Update on ‘An Option Strategy to Put the Odds on Your Side’

         See also One More Plunge for Crude Oil?

A short while back I wrote a piece detailing an option strategy that can improve your odds of profit.  This strategy is typically referred to as a “Directional Calendar Spread”.  The trade in the original article involved buying 18 July CSCO 29 calls and selling 12 May CSCO 29 calls.  The details appear in Figures 1 and 2 below.5Figure 1 – Original CSCO Directional Calendar Spread (Courtesty OptionsAnalysis.com)

6Figure 2 – Original CSCO Direction Calendar Spread risk curves  (Courtesty OptionsAnalysis.com)

Well its expiration day for the May calls and as of the close the day before the original trade now looks like this:3

Figure 3 – CSCO trade as of 5/14/15 (Courtesty OptionsAnalysis.com)

4Figure 4 – CSCO trade risk curves as of 5/14/15 (Courtesty OptionsAnalysis.com)

There are two key things to note about this position:

1) As of the close on 5/14, CSCO stock was trading at $29.05 and the short May call was trading at $0.13 bid/$0.17 ask.  If CSCO closes at $29 or below on expiration day this option will expire worthless and the entire premium will be kept.  So basically there is still roughly $204 of time premium ($0.17 times 12 short option contract) to potentially be captured today (i.e., $204 of additional profit) IF the stock trades lower.

2) On the other hand, if CSCO closes today (May option expiration day) above $29 a share, the May 29 call will be “in-the-money” and the calls that I sold (hypothetically speaking FYI) will be “exercised”, which means that unless I also contact my broker and exercise 12 of my 18 July 29 calls to offset this, come Monday morning my position will be:

a) Long 18 July CSCO 29 calls

b) Short 1,200 shares of CSCO stock (Yikes!)

Did we enter this trade because we want to hold a short position in CSCO stock?  H%^& No!!

So what’s a trader to do!?

Because – in the interest of full disclosure – I don’t want to spend all day writing, rather than discussing all of the possible actions that a trader holding this position could take, I am simply going to choose one and use that as an example (Sorry, it’s just my nature).

One Example Adjustment

For argument’s sake, let’s say:

a) I am still bullish on CSCO

b) No way do I want to wake up Monday morning short 1,200 shares of CSCO stock

c) I am a greedy pig who wants to suck out all of the profit potential I can (again, sorry, it’s just my nature)

I can watch CSCO during the day.  My goal is to capture as much of the potential time decay from the short May option as possible.  Still, I don’t want to take a chance of having the short May calls exercised against me.  So let’s say CSCO stock is still trading at $29.05 towards the end of the day. I can take the following action before the end of the day:

*Buy 12 May CSCO calls (which closes entire position in May calls)

*Sell 15 July CSCO calls (which leaves a position of long 3 July calls)

The net effect of these actions leaves me with the reward-to-risk trade off that appears in Figures 5 and 6 (actually, it would look a little better since I would likely buy back  the May calls at a lower price as the May 29 call drops from $0.17 to $0.05 as time premium vanishes).

5Figure 5 – Adjusted CSCO position  (Courtesty OptionsAnalysis.com)6Figure 6 – Adjusted CSCO position  (Courtesty OptionsAnalysis.com)

The Net Effect

At this point, the position has locked in a profit.  In other words, if this position is held until July expiration and CSCO stock is at $29 a share or less this position will expire with a net profit of $81.  OK, granted $81 isn’t much, but the point is that for the next two months I have a “free trade” with unlimited profit potential.

If you have never found yourself in a trade in which you cannot possibly suffer a  loss no matter how badly things go wrong – and you have unlimited profit potential to boot if things go well – then please take my word for it when I say, “it’s a good feeling.”

Summary

There are many other adjustments that a trader could make instead of the one I’ve highlighted here.  But the main point(s) of this article are:

a) Always be aware of the fact that if an option that you sell expires “in-the-money” you could wake up the next Monday short shares of stock (if you have never learned this lesson the hard way – then please take my word for it when I say, “it’s NOT a good feeling”).

b) If you learn a few basics about options you can put the odds in your favor.

Jay Kaeppel

An Update/Clarification to a ‘Simple Pattern’ for Trading

See Jay’s latest post: One More Plunge for Crude Oil?

It’s been (alas, correctly) brought to my attention that my description of the “Simple Pattern” I wrote about was, um, not so simple.  To wit, the author writes:

“Not every Day 1 signal generates an entry signal. If the 2nd trading day after the “close below previous low” (Day 3) does not trade above the high of the day after the “close below previous low” day (Day 2), then no further entry signal exists and the pattern is voided.”

Huh?

OK, so under the category of “A picture is worth a whole bunch of words”, please consider the examples below.

Example #1

simple pattern example 1

Day 1 – the close is below the previous day’s low

Day 2 – the day after Trading Day 1

Day 3 – price breaks above Day 2 high triggering a long trade

1st profitable close occurs on day after Day 3

Example #2

Simple pattern example 2

Day 1 (1st red arrow) – the close is below the previous day’s low

Day 2 (1st blue arrow) – the day after Trading Day 1

Day 3 (not marked) – price DOES NOT exceed Day 2 high, so signal is voided

Day 1 (2nd red arrow) – the close is below the previous day’s low

Day 2 (2nd blue arrow) – the day after Trading Day 1

Day 3 (green arrow) – price DOES exceed Day 2 high, trade is entered above Day 2 high

1st profitable close – Price closes above entry price on Day 3 so trade closed there

Hopefully these examples help.

Jay Kaeppel

One More Plunge for Crude Oil?

I wrote recently that in order to overcome my obsession with Elliot Wave Theory I had to join a five step program (three steps in the right direction with two minor setbacks in between).  I’m feeling much better now.  But I am not entirely cured.  One thing that still attracts my attention is when the daily and weekly wave counts agree.  Don’t tell my sponsor.  To wit:

Elliott Wave meets Crude Oil

The charts shown in Figures 1 and 2 show the weekly and daily charts for ticker USO (an ETF which is designed to track the price of crude oil).  Figure 1 displays the weekly chart with the weekly Elliott Wave count as calculated by ProfitSource by HUBB. Figure 2 displays the daily chart with the daily Elliott Wave count, also as calculated by ProfitSource by HUBB.

1Figure 1 – Weekly USO with Elliott Wave count from ProfitSource by HUBB

2Figure 2 – Daily USO with Elliott Wave count from ProfitSource by HUBB

A few things to note:

1. I use ProfitSource to analyze Elliott Wave because it has a built in formula for determining the current wave count at any given point in time.  For better or worse, I much prefer this to my previous method of determining the current wave count which basically involved staring at a chart until either:

a) the “wave” would appear to me, or;

b) my head started to hurt.

In either case I would draw numbers (or letters) and lines on the chart in a fashion that had to be at least 150% subjective (hence the five wave program).

2. As I mentioned earlier the only time I really pay attention to Elliott Wave counts these days is when the weekly and daily counts for a given security match up and are point to a Wave 5 advance or decline.

3. For the record, just because the two counts match up there is absolutely no guarantee that the expected move will play out.  Still, I have seen enough times when it has that this setup still draws my attention.

4. In Figures 1 and 2 you can see that both the weekly and daily wave counts are threatening to break to the downside in a Wave 5 decline and if that happens both are projecting sharply lower prices for USO (assuming the breakdown does occur).

5. Finally, for the record, price needs to break down below the daily and weekly “blue line” shown in Figures 1 and 2 to fully suggest the beginning of a Wave 5 down move.  So the trade shown below in Figures 3 and 4 is a hypothetical example and not a “recommendation.”

What to Do With This Information

What to do with this information depends on a few factors:

1. If you are a true “Elliott Head” then you start looking for a way to make a lot of money playing the short side of crude oil.

2. If you are not a true “Elliott Head” or (and I’m not naming any names here) if you are a “recovering Elliott Head” then you may be more inclined to consider a trade that could make a lot of money if crude does in fact plunge. But no way in heck are you going to “bet the ranch.”

If you fall into the former category then in all candor your best play is probably to sell short crude oil futures contracts as they offer the most direct play on a bearish scenario for crude oil.  At $1,000 per a $1 move in the price of crude futures contract offer the most “bang for the buck” for a trader looking to play a particular trend in crude.

Of course, at $1,000 per a $1 move in the price of crude they also offer a lot of “bang” to the level of capital in your trading account if you get my drift if you get the trend wrong.

If you fall into the latter category then you may not be quite so interested in “playing the trend”, but you might be interested in “taking a shot” that the extremely bearish scenario suggested in Figures 1 and 2 might actually play out.

So let’s be clear:

What appears in Figures 3 and 4 is not a “trend trade”, but rather a (slightly premature) “pure, out and out speculative play” based on nothing but the possibility (hope?) that crude oil will experience another plunge between now and August option expiration.  Any other scenario – an up move, a sideways move, a slight down move – will result in a total loss of the premium paid.  So the key here is to put a maximum of about 1% of your trading capital into a trade like this and no more.

This trade involves buying 10 USO August 15 puts at $14 apiece.3Figure 3 – Long USO Aug 15 puts (Courtesy www.OptionsAnalysis.com)4Figure 4 – Long USO Aug 15 puts (Courtesy www.OptionsAnalysis.com)

In a nutshell this trade requires a capital outlay of $140.  This also amounts to the maximum risk on this trade.  So in terms of dollar risk, we are not exactly breaking the bank.

On the downside, ProfitSource is essentially projecting USO to fall to somewhere between $10 and $12.  Please remember that this is simply a mathematical calculation – there are no crystal balls involved.  And in general, one is usually best served to assume that the extreme case will not play out.  Hence the reason we are risking $140.

Still, if by chance USO does fall to $12 or $10 a share prior to August option expiration, this position will generate a profit of somewhere between $3,000 and $4,800.  Which – to put it into technical terms – “ain’t too shabby” for risking all of $140.

Summary

As always I am not “recommending” that you make this very speculative trade.  Especially given the fact that:

a) As I write USO has technically not entered into a Wave 5 decline, and;

b) While the reward-to-risk ratio is high, this is what is known as a “low probability” trade, i.e., mathematically speaking, the probability of USO being at or below the breakeven price of $14.86 by August option expiration is about 6% (note that we are not relying on “probability” to trigger this trade.  At least for the sake of this example, “We are all Elliott Heads now.”)

The example covered  here merely illustrates the potential for using Elliott Wave to identify possible areas for speculation and how to use options to get the most bang for you buck.

In considering the hypothetical position highlighted here, a trader must ask and answer three key questions:

 1. Are you comfortable speculating on crude oil using options?

2. Do you think it is at least possible that crude oil will plunge between now and August option expiration?

3. Do you have $140 bucks?

If you answered “Yes” to all three – you should still stop and think long and hard before potentially wasting your hard earned money on rank speculation.  But if USO does fall to $12 a share……..

Jay Kaeppel

A ‘Simple Pattern’ for Trading

See Jay’s latest post: One More Plunge for Crude Oil?

As I admitted in my last post, I am a something of a trading “systemaholic”.

And yes, on many occasions I have started out with a simple idea and by the time I was done I had 600 lines of code and only  a vague recollection of what that original simple idea was.  So take it from me: While “complex” can be good, in the end the complexity of a trading method typically says very little about the ultimate usefulness of said trading method.

And yes, “simple” can definitely be beautiful.  So let’s look at a simple pattern.

Jay’s “Simple Pattern” Defined

To generate a buy signal this method looks for a particular 3-day pattern while the security in question is above its 200-day moving average.

*Filter: Security is trading above its 200-day moving average

*Day 1: Security closes below the low of the previous day

*Day 2: The day after Day 1 has no trading significance

*Day 3: Buy if the high of Day 3 is greater than the high of Day 2 (if no buy occurs on Day 3 the pattern is voided)

*The default is to buy at the Day 2 high plus ??? ($0.02?).  This would involve placing a stop order prior to the trading of Day 3.  But traders are encouraged to experiment with other entry methods.

*Set a stop-loss (open to discussion as to how far away to place stop)

*If not stopped out, then Exit on the first profitable close

That’s it.

This can also be utilized using weekly data, just use a 30-period (week) moving average as a trend filter rather than a 200 period moving average.

Example #1

simple pattern example 1

Day 1 – the close is below the previous day’s low

Day 2 – the day after Trading Day 1

Day 3 – price breaks above Day 2 high triggering a long trade

1st profitable close occurs on day after Day 3

Example #2

Simple pattern example 2

 

 

Day 1 (1st red arrow) – the close is below the previous day’s low

Day 2 (1st blue arrow) – the day after Trading Day 1

Day 3 (not marked) – price DOES NOT exceed Day 2 high, so signal is voided

Day 1 (2nd red arrow) – the close is below the previous day’s low

Day 2 (2nd blue arrow) – the day after Trading Day 1

Day 3 (green arrow) – price DOES exceed Day 2 high, trade is entered above Day 2 high

1st profitable close – Price closes above entry price on Day 3 so trade closed there

Hopefully these examples help.

Jay’s “Simple Pattern” in Action

For the sake of example, let’s look at a daily bar chart for ticker IYR. In Figure 1 you see the daily chart with arrows drawn on all trading days that closed below the previous day’s low.  these days represent Day 1 in the pattern above.iyr daily 1Figure 1 – Ticker IYR with closes below previous low marked (this constitutes Day 1)  (Courtesy: AIQ TradingExpert)

Not every Day 1 signal generates an entry signal.  If the 2nd trading day after the “close below previous low” (Day 3) does not trade above the high of the day after the “close below previous low” day (Day 2), then no further entry signal exists and the pattern is voided.

Figure 2 displays ticker IYT with Day 3 highlighted only when an entry signal occurs.

iyr daily 2Figure 2 – Jay’s “Simple Pattern” Day 3 entry Signals for Ticker IYT  (Courtesy: AIQ TradingExpert)

Figure 3 displays IYT “Simple Pattern” buy signals using a weekly bar chart.

iyr weeklyFigure 3 – Jay’s “Simple Pattern” Day 3 entry Signals for Ticker IYT using Weekly Chart (Courtesy: AIQ TradingExpert)

The Difference Between a Trading “System” and a Trading “Method”

In my (troubled) mind:

*A trading “system” invokes a specific  set rules that tell the trader exactly when to buy and sell.

*A trading “method” is merely a set of criteria that helps to identify trading opportunities and typically comprises part of a trading system.

I consider this “Simple Pattern” to be more of a “Method” than a “System”.  Still for arguments sake, if I:

*Use it systematically using daily eMini S&P 500 data

*Subtract 0.25 S&P points for slippage & commission per contract buying and selling

*Use a stop-loss of 40.00 S&P points (a very wide stop FYI)

*Buy a 3-lot on each signal

*Exit on the first profitable close (if not stopped out)

I get the following hypothetical results starting in January 2007:

*Cumulative Gain= $67,163

*Maximum Drawdown = $11,400

*# Winning trades = 123 (88%)

*# Losing trades = 17 (12%)

*Average $ win = $1,203

*Average $ loss = (-$4,754)

The hypothetical growth of equity appears in Figure 4.4Figure 4 – Hypothetical results trading 3-lot of eMini S&P using Jay’s “Simple Pattern”; 2007-Present  (Courtesy: AIQ TradingExpert)

Figure 5 displays a “continuous” eMini S&P chart (front trading months strung together).  “Day 2″‘s are highlighted in blue, “Day 3″‘s that resulted in a buy signal are highlighted in green.5Figure 5 – EMini S&P futures with Days 2 in blue; Day 3 buy signals in green (Courtesy: AIQ TradingExpert)

Summary

So does this “Simple Pattern” constitute a viable standalone trading “system?”  I leave you to figure that out on your own.  But in any event the real point of this piece is simply to highlight the fact that when it comes to choosing a method or methods for trading in the financial markets, keep in mind:

Jay’s Trading Maxim #17: When it comes to the method you use to trade, remember, “It doesn’t have to be rocket science.”

Jay Kaeppel

One of My Favorite Websites for Trading Systems and Ideas

See Jay’s latest post “A Simple Pattern for Trading”

A while back I got over my addiction to Elliott Wave analysis. I finally realized I needed help and joined a five wave, er, step program. But some obsessions still linger. As an admitted “systemaholic” (“Hi, my name is Jay”) I am always on the lookout for new ways to make money without thinking. That’s actually not quite a fair statement. With a trading system you do your best thinking “up front” and then build it into a set of rules that can be repeated over and over. The basic idea is to remove the threat of experiencing that “OH MY GOD I AM LOSING MONEY I NEED TO DO SOMETHING REACTIONARY RIGHT THIS VERY SECOND THERE THANK GOODNESS I PANICED JUST IN THE NICK OF TIME OH WAIT CRAP THE MARKET JUST TURNED BACK IN MY FAVOR” moment.

I am guessing that most of you know what I am talking about.

One of my favorite websites for exploring new trading ideas – and in most cases, not just “ideas” but well researched and fleshed out systems is www.Quantocracy.com. In their own words Quantocracy is “a curated mashup of quantitative trading links”, which basically means they cull the best quantitative trading ideas they can find from a variety of websites and blogs and report back to you the reader.

One word of “warning”: when you click on a link from Quantocracy you’d better have your “thinkin’ cap” on, because most of the articles linked involve some serious analysis of some aspect of the financial markets.

Just remember, that’s a good thing.

Jay Kaeppel

Great Thoughts for Traders to Ponder

The words below come from an email I received last week.  The email was a weekly missive from Gregory H. Adams, a colleague of mine in the American Association of Professional Technical Analysts (AAPTA) and the Chief Investment Strategist at Allen, Mooney & Barnes Investment Advisors, LLC.  He left the source of the words below a mystery, but there is a great deal of wisdom contained.  As always, traders should not accept someone else’s experience and perception override their own thinking.

But good words of wisdom are always useful.  Thanks Greg for passing this on.

From Greg Adams email:

WOULD YOU BE INCLINED TO FOLLOW THE INVESTMENT ADVICE BELOW, WHICH WAS QUOTED ON AN OBSCURE WEBSITE THIS PAST WEEK? WHO SAID IT? TUNE IN NEXT WEEK FOR THE ANSWER.

1. Markets have consistently experienced “100-year events” every five years. While I spend a significant amount of my time on analytics and collecting fundamental information, at the end of the day, I am a slave to the tape (and proud of it).

2. Younger generation are hampered by the need to understand (and rationalize) why something should go up or down. By the time that it becomes self-evident, the move is over.

3. When I got into the business, there was so little information on fundamentals, and what little information one could get was largely imperfect. We learned just to go with the chart. (Why work when Mr. Market can do it for you?)

4. There are many more deep intellectuals in the business today. That, plus the explosion of information on the Internet, creates an illusion that there is an explanation for everything. Hence, the thinking goes, your primary task is to find that explanation. As a result of this poor approach, technical analysis is at the bottom of the study list for many of the younger generation, particularly since the skill often requires them to close their eyes and trust price action. The pain of gain is just too overwhelming to bear.

5. There is no training — classroom or otherwise — that can prepare for trading the last third of a move, whether it’s the end of a bull market or the end of a bear market. There’s typically no logic to it; irrationality reigns supreme, and no class can teach what to do during that brief, volatile reign. The only way to learn how to trade during that last, exquisite third of a move is to do it, or, more precisely, live it.

6. Fundamentals might be good for the first third or first 50 or 60 percent of a move, but the last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic.

7. That cotton trade was almost the deal breaker for me. It was at that point that I said, ‘Mr. Stupid, why risk everything on one trade? Why not make your life a pursuit of happiness rather than pain?’

8. If I have positions going against me, I get right out; if they are going for me, I keep them… Risk control is the most important thing in trading. If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in.

9. Losers average down losers

10. The concept of paying one-hundred-and-something times earnings for any company for me is just anathema. Having said that, at the end of the day, your job is to buy what goes up and to sell what goes down so really who gives a damn about PE’s?

11. The normal progression of most traders that I’ve seen is that the older they get something happens. Sometimes they get more successful and therefore they take less risk. That’s something that as a company we literally sit and work with. That’s certainly something that I’ve had to come to grips with in particular over the past 12 to 18 months. You have to actively manage against your natural tendency to become more conservative. You do that because all of a sudden you become successful and don’t want to lose what you have and/or in my case you get married and have children and naturally, consciously or subconsciously, you become more conservative.

12. I look for opportunities with tremendously skewed reward-risk opportunities. Don’t ever let them get into your pocket – that means there’s no reason to leverage substantially. There’s no reason to take substantial amounts of financial risk ever, because you should always be able to find something where you can skew the reward risk relationship so greatly in your favor that you can take a variety of small investments with great reward risk opportunities that should give you minimum draw down pain and maximum upside opportunities.

13. I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.

(Word above not from) Jay Kaeppel

The Best VIX Strategy I’ve Found….But Still Don’t Quite Believe

Sorry folks, I had to pull this one at least for now.  It was pointed out to me that there was a flaw in the calculations I was using…..which would explain why it “looked too good”.

I am going back to the drawing board to re-examine if there is still some way to make the original idea useful.

Thanks to Mike and www.Quantocracy.com for alerting me to the potential “error in m ways.”

Jay Kaeppel