No way to do that, you cannot diversify systematic risk. Most were employing "smoothing" using illiquid assets and got ruined when the black swan hit. It was also a way to deceive customers. When you see a fund up 11 months in a row and suddenly down 30%, these are not traders, they are crooks.
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how to cut losses as a global macro trader?
- Thread starter SethArb
- Start date
Quote from intradaybill:
No way to do that, you cannot diversify systematic risk. Most were employing "smoothing" using illiquid assets and got ruined when the black swan hit.
True, I agree. imo, the Real "Smoothing" mainly comes internally from the system design itself, built with defensive strategies, rather than from any theoretical diversification of asset classes, which only contributes a relatively small portion for smoothing.
very solid contribution thank you, I agree with you. Nice to see some quality post in a long time. I wanted to share my thoughts but you made most of my points already.
Quote from Cutten:
Your title says how to cut losses, your post says how to handle swings, which is it?
The way to handle swings is to reduce your size small enough that normal market fluctuations do not lose you enough money to bother you, or to use options to limit your maximum loss to an acceptable amount.
As for cutting losses, which I understand as exiting once you realise you are wrong, you need to first define what would prove your position to be incorrect. If that thing then occurs, you're probably wrong and should exit. Make sure you trade small enough, or are sufficiently hedged with options, that the amount of loss in this event is acceptable to you.
In my opinion, it is pretty hard to make more than 2 or 3 times your risk on an annual basis trading global macro style, and most good traders don't get much above 1:1. So if you are gunning for 30% then you should be prepared for 20-30% drawdowns too on occasion.
To get an idea of the volatility vs returns, just look at any major macro move. For example, the move in oil from $30 to $147 and back. Both on the way up and the way down, there were significant pullbacks - many of 10%, some of 20%, and the rally had a pullback from 77 to 49 (36% pullback). So you had a 390% gain, with maximum 36% pullback, a very nice 11:1 ratio. In reality though you would never buy the low and sell the high. More likely, even the best traders got long maybe somewhere in the 40s and sold either in the 90s or maybe 120something. Or the true believers were long from 30 and got stopped out on the way back down at 90 or 80 or 70. So the real ratios were probably more like 150% or 200% profit with a 36% drawdown, a 5.5:1 ratio. Still very nice, most trades aren't that good.
Here are some other examples from the last year or so:
Short pound, from 2.00 to 1.40 = 30% return, max pullback was 11%. slightly under 3:1 ratio.
Short S&P, from 1500 down to 700 =53% profit, maximum drawdown was 27%. Roughly 2:1 ratio.
Short oil from 147 to 40. 73% profit, max DD was about 25-30%. 2.5:1 ratio.
So as you can see, even excellent macro trades generally have profit only 2-3 times the maximum pullback. Some rare trades are better than that, but most will be in the 2-3 range. So IF you can select these good trades and avoid bad ones, you could get 2-3 times your risk on a portfolio basis. If you select multiple trades, your DD will be lower due to diversification. In the real world, you won't ride every, or even most, macro trade opportunities to the full. You will miss some, you will be on the wrong side of some, you will exit prematurely or enter later on others etc. So although theoretically a perfect macro portfolio could make 5-10 times its risk, in the real world it's more like 1 times as a reasonable goal, and 2 or 3 times would be superstar performance.
George Soros for example has averaged 30-40% over various long periods, and he has had occasional peak-valley drawdowns of similar amounts (although his calendar year results are better in terms of risk, it's peak/valley that matters).
IMO, macro trading is all about risking 1, 2, 3% per trade and making 3, 6, 9% when you are right on the trade, doing that 3-10 times per year, and aiming for 15%-50%, whilst keeping drawdowns to 10% or less ideally, and definitely below 20%. If you have a good run, compounding equity allows you to turn a good 4-5 month run into potentially a 50%+ year. It is tempting to trade bigger and try to score 20-30% on a single trade, but except a few rare options trading opportunities (e.g. calling a market crash in advance), that is very hard to do without taking commensurately large risk. Remember our 2.5:1 ratio. If you are trying to score 25% on a trade, your risk is likely to be 10%. A 10% drawdown is something you should strive to avoid in any given year. Losing that on one single trade is insane. So keep your size down.
agree, hard to pick trades at the moment that are relatively uncorrelated. Look at xxx/usd and xxx/jpy pairs. They highly correlated with each other most of the time last and this year then this past two month we twice witnessed a complete breakdown in correlations in those two instrument categories just to see how their correlations came back as soon as risk aversion set in. Same to be witnessed in many other commodities.
Quote from Pa(b)st Prime:
I trade many different futures and options markets-index, Treasuries, currencies, grains, metals. A big, big problem is since the "crash" the correlation between every market under the sun is pretty virtual. For example I've had sell signals for a few days in ES, currencies and grains. I can only take one because in reality they're ALL THE SAME TRADE. Charts of the Dow, Pound, crude, soybeans are indistinguishable from one another.
So if a diversified manager takes 6 different positions chances are unless he's spread within a class, he may be 6x more asset short than prudent or 6x more inflation worried than prudent. There are times when commodities are completely anti-correlated to stocks as well so the hard part is knowing when they're decoupling which of course will happen again soon enough.
Good stuff here. Some ET heavyweights pitching in. 1 thing to note about macro correlations is that related instruments, ie: short yen as proxy for long S&P or long CL/long S&P, can give better R:R for the same trade. Unless you decide to take 2x leverage, that is. If you only trade 1 side of the correlation, the other side is obviously your hedge.
Cutten's #'s are #'s I normally get as well. He's not spitting out voodoo magic.
Cutten's #'s are #'s I normally get as well. He's not spitting out voodoo magic.
Isn't all this part of the job description of a macro trader?Quote from Pa(b)st Prime:
So if a diversified manager takes 6 different positions chances are unless he's spread within a class, he may be 6x more asset short than prudent or 6x more inflation worried than prudent. There are times when commodities are completely anti-correlated to stocks as well so the hard part is knowing when they're decoupling which of course will happen again soon enough.
Everything is variable and it's your job to be aware of the real risk you're running, as opposed to the numbers you see on the screen. That's where it turns into art rather than science.
To re-iterate, and I speak from bitter personal experience, it's more about sizing than anything else. You can be a 1000 times right, but if you size the trade wrong and never get to see it go right, what use is that?
Quote from makloda:
According to the "House of Money" - as far as my recollection goes - many global macro managers use directional option positions to express their bets, thus have a "built in" stop loss -- when the options expire worthless.
According to the book, regarding "Why Global Macro is the way to go", "Because finding high-quality, uncorrelated trades is not easy, the ability to find multiple better-than-average independent bets is what separates a star hedge fund manager from the rest of the herd. To become a star, the notion of diversification must be pushed to an extreme."
I am so unhappy with all this 'Global Macro is the way to go' crap that's making the rounds in the mkt now...
It's no more the 'way to go' than any other group of strategies. There's nothing inherently better or worse about global macro types of trading over a longer horizon. As a style it has its advantages, which made its strategies particularly successful last year. However, it has flaws, which people forget. Moreover, the issue of survivorship bias is much more difficult to filter out in the data on performance of macro strategies, so it makes me a lot more skeptical about simplistic conclusions.
All this faddish bull that's propagated by journalists in books and newspapers is annoying and unconstructive.
It's no more the 'way to go' than any other group of strategies. There's nothing inherently better or worse about global macro types of trading over a longer horizon. As a style it has its advantages, which made its strategies particularly successful last year. However, it has flaws, which people forget. Moreover, the issue of survivorship bias is much more difficult to filter out in the data on performance of macro strategies, so it makes me a lot more skeptical about simplistic conclusions.
All this faddish bull that's propagated by journalists in books and newspapers is annoying and unconstructive.