The GoC challenge: how would you trade this market setup?

[Ghost of Cutten]

Quote from Daal:

I'd put close to 100% of my networth there. Can't see anything better to put on given these numbers. As that bull rode on I would have to decrease that % as the expectation is looking less attractive

Ok, so the question then is, what do you do for example in 2008 when gold fell over 30%? Just hang on while 30% of your net worth disappears, and for all you know it could become a 40 or 50% drawdown? I think I could handle about a 10% drawdown in total net worth, if I had the conviction, but not 20 or 30%, that would freak me out on just one position.

Or if you scale out...well, we know how that usually plays out, you get long at $300, then scale out at $400, $500, $600 as it goes higher than you think...then a few years later it's 1000 and then at 2000, and you are regretting scaling out Remember the timing attempts on your short financials journal, they did worse than just sitting on it.

I can only really think of 3 ways to handle it:

i) place the trades on small enough size that you can ride out the drawdowns without stress.

ii) try to time the corrections, then get back in once the worst is over. Pretty difficult IMO.

iii) buy some puts to hedge when the market is particularly extended and speculative, or the outlook looks terrible. Most times they will probably expire worthless, but occasionally they will save your ass and you'll lose 10% instead of 30%. Not sure if this will improve profitability but it should reduce risk somewhat.

 

[SWScapital]

Quote from Ghost of Cutten:

What would be your approach?

I would buy 50% of my position straight away.

Then DCA 5% monthly(1.25% a week on monday morning) additional regardless of price until I got to 100% of my speculative account.

Then I would wait for your 30% loss level off avg price or limits lifted 200% gain off avg...set it and forget it with a 6.66 RR..bwahaahhahahaaaaaa

Yup...thats how i`d do it. I have no problem risking 30% of my entire account to make 200%.

I do it all the time. Usually risk a little less though to make less though. 10-20% total account looking for 50%+ on that investment. But if my numbers were solid and the approach was as valid as you suggest balls to the wall would make me sleep easier than being smaller.

 

[promagma]

Quote from Ghost of Cutten:

Time decay. Options can definitely be used to improve entry and exit, but you are still stuck with the eternal risk tradeoff. You simply cannot profit from a massive move without accepting the risk of either i) holding on for the long-haul and suffering numerous big drawdowns, or even a huge drawdown if you are wrong and a bear market occurs ii) trying to time the drawdowns, and then either getting chopped up whilst doing so, or exiting and not getting back in etc iii) using options to hedge your risk, and seeing your premium evaporate as the market churns back and forth. Premium payments also subtract from your profit.

No real solution I can see except to either i) be right, and be able to hold on ii) be a great market timer - both on exit AND re-entry.

In the GLD example, you lose $1.50 per year to time decay, but gain some advantages -

- Fixed risk in case of catastrophic drawdown
- No stop loss - in case of catastrophic drawdown you won't get shaken out if it recovers within 1 year
- Compound your profits

Definitely a roller coaster ride but IMO it may be worth it.

 

[rdg]

Quote from Ghost of Cutten:

...
iii) buy some puts to hedge when the market is particularly extended and speculative, or the outlook looks terrible. Most times they will probably expire worthless, but occasionally they will save your ass and you'll lose 10% instead of 30%. Not sure if this will improve profitability but it should reduce risk somewhat.

How about buying OTM puts when the market is extended and then converting them synthetically to calls if the market does correct? Then you can participate with >100% exposure at times and still control your risk. I don't know how well this works in practice, but it's something I've been experimenting with.

Another option is to trade a correlated market countertrend. The end result is basically the same, but psychologically it is easier since you aren't touching Your Position. You can do all the normal pro moves like cutting your losses short and letting winners run in the correlated market and try to make a buck.

I just reread one of Pabst's posts from 2002. This has always stuck with me and has formed the basis of the swing trading I've done lately. Basically, in bull markets, there are prices that trade today that won't trade again until the move is over. These prices can be found with some trial and error (ie, small losses) and then they just go in the bank until the move is over.

Quote from Pabst:

But as someone who has seen the likes of Rich Dennis and Tudor Jones operate, those "5%" winning trades involve add on after add on. Case in point is Dennis in the 1985-1986 bull market in bond futures. He would start with his normal unit of 500 contracts and get chopped for days. Buy the days high, put em back out on a new swing low ect. Every once in a while he'd wind up with 500 that worked. Then he'd start the process higher, all over again. Work em in, work em out. After maybe a couple of months the market has rallied 10pts. from where he started and he has 2000 on.(meaning 2million a point) Now the market is short and ready to pop on any size buying and he's there supplying the noose. Bidding for 500 on every up tick, finally gets to a point where for the last month of the move he has 5000 on. T-Bonds rally 20 pts. in just over a month and he's up $100,000,000 on a trade that started out with him just testing the waters,losing $100,000 a few times before he could establish a position worth doubling up on.

 

[Ghost of Cutten]

Quote from SWScapital:

I would buy 50% of my position straight away.

Then DCA 5% monthly(1.25% a week on monday morning) additional regardless of price until I got to 100% of my speculative account.

Then I would wait for your 30% loss level off avg price or limits lifted 200% gain off avg...set it and forget it with a 6.66 RR..bwahaahhahahaaaaaa

Yup...thats how i`d do it. I have no problem risking 30% of my entire account to make 200%.

I do it all the time. Usually risk a little less though to make less though. 10-20% total account looking for 50%+ on that investment. But if my numbers were solid and the approach was as valid as you suggest balls to the wall would make me sleep easier than being smaller.

OK so basically you'd just accept the volatility and ride out the swings. That's fair enough. At the moment I am doing the same, just with less than 100% of capital (about 30-40% is about the most I feel comfortable committing to something that could drop by 1/3). But I keep thinking there must be a way to improve on this, maybe I'm just trying to get a holy grail that doesn't exist lol.

 

[Ghost of Cutten]

Quote from rdg:

How about buying OTM puts when the market is extended and then converting them synthetically to calls if the market does correct? Then you can participate with >100% exposure at times and still control your risk. I don't know how well this works in practice, but it's something I've been experimenting with.

Another option is to trade a correlated market countertrend. The end result is basically the same, but psychologically it is easier since you aren't touching Your Position. You can do all the normal pro moves like cutting your losses short and letting winners run in the correlated market and try to make a buck.

I just reread one of Pabst's posts from 2002. This has always stuck with me and has formed the basis of the swing trading I've done lately. Basically, in bull markets, there are prices that trade today that won't trade again until the move is over. These prices can be found with some trial and error (ie, small losses) and then they just go in the bank until the move is over.

First approach is basically the options hedging. Second one is trying to time the move i.e. load up once the momentum gets going. Great IF you have the timing to do it.

Maybe the best approach is to do all 3. Split your capital into 3 tranches and buy & hold with 1/3, use options hedges on another 1/3 when it gets crazy overextended, and exit the final third when it's way overdone, then buy back once the selloff has taken place and looks to be running out of steam.

I guess with this 1/3 1/3 1/3 hybrid approach at least you don't second guess yourself and at least ONE of them has to work, if you are right!

 

[Daal]

Quote from Ghost of Cutten:

Ok, so the question then is, what do you do for example in 2008 when gold fell over 30%? Just hang on while 30% of your net worth disappears, and for all you know it could become a 40 or 50% drawdown? I think I could handle about a 10% drawdown in total net worth, if I had the conviction, but not 20 or 30%, that would freak me out on just one position.

Or if you scale out...well, we know how that usually plays out, you get long at $300, then scale out at $400, $500, $600 as it goes higher than you think...then a few years later it's 1000 and then at 2000, and you are regretting scaling out Remember the timing attempts on your short financials journal, they did worse than just sitting on it.

I can only really think of 3 ways to handle it:

i) place the trades on small enough size that you can ride out the drawdowns without stress.

ii) try to time the corrections, then get back in once the worst is over. Pretty difficult IMO.

iii) buy some puts to hedge when the market is particularly extended and speculative, or the outlook looks terrible. Most times they will probably expire worthless, but occasionally they will save your ass and you'll lose 10% instead of 30%. Not sure if this will improve profitability but it should reduce risk somewhat.

I believe its a matter of how good of a short-term trader one is. When someone has strong evidence that a correction might be coming he will have to hedge out by either decreasing sizing or by buying options
I made a mistake this year by decreasing on gold before the QE rally, I thought it was overextended but I had not clear evidence of that, so missed some of those profits. I did had better evidence on the fed futures, there I just knew Dec 2011 selling at a 5 bps discount to the fronts was a huge joke that had to be sold. I've been watching this market for years I know how moody it is(and how noisy stuff like NFP is) so I sold out most before the decline

So in my view the way to go is to have as default 100% of the position except when you have STRONG evidence that something is going to happen, if it's just a 'worry' or 'feeling' its not enough, if one is not good enough of a short-term trader than you keep the full position(and decrease to the level where the vol doesn't hurt your sleep). You might decrease the position in the other scenario I mentioned(you keep making money and decrease because the bull market is playing out and expectation is getting worse, you dont want to be an JSDU ex-millionarie)

 

[sprstpd]

Note: this will come off as bragging and since I never post about my results on this forum, may be hard for people to believe. However, its funny this thread found me just when I was thinking about/fighting with the same issue.

I make my living by daytrading. But I do read people like Fleckenstein and Kuppy for longer term investment ideas. And because of them I took a large position (for me) in gold, silver and other commodities when gold was around $700. I exited all these positions at the open on November 9th, 2010 because I just couldn't take it anymore. The large gaps in all commodities that morning on top of their previous monster moves just made me sell everything (not to mention Rearden Metal's silver call the previous evening). I really didn't want to sell those positions and I hope to build up my gold and silver positions again (I have nibbled a bit here and there on this move down). I.e., I feel naked without some exposure to gold and silver and I feel we are not at the ultimate top in the precious metals.

So I am attempting to time a short term correction in this market and so far it is going okay. My position currently is about 1/10 of what it was going into November 9th so I have certainly dodged a bullet. However, who is to say gold and silver don't take off without me? I don't know the answer to that. I would hope that I would have the balls to get back in these positions if they were to power higher. Maybe set a buy-stop if certain prices in gold and silver get violated and I do not have my full position on? I.e., if I am incorrect, my stop will guarantee that I will get back in the position (but maybe at higher prices). However, I certainly have no stops in currently - I am just hoping for lower prices to reload.

I guess to summarize, here is what I think might be a decent "method":

1. Buy a core position
2. Never sell until the opportunity seems so ripe for a correction that you physically get ill thinking about it
3. Attempt to reload at lower prices but always have a buy stop for reentry
4. Wait for the ultimate blow-off top to unload for good

 

[outsource]

natural gas for the next 5-7yrs

 

[achilles28]

Quote from rdg:

How about buying OTM puts when the market is extended and then converting them synthetically to calls if the market does correct? Then you can participate with >100% exposure at times and still control your risk. I don't know how well this works in practice, but it's something I've been experimenting with.

Another option is to trade a correlated market countertrend. The end result is basically the same, but psychologically it is easier since you aren't touching Your Position. You can do all the normal pro moves like cutting your losses short and letting winners run in the correlated market and try to make a buck.

I just reread one of Pabst's posts from 2002. This has always stuck with me and has formed the basis of the swing trading I've done lately. Basically, in bull markets, there are prices that trade today that won't trade again until the move is over. These prices can be found with some trial and error (ie, small losses) and then they just go in the bank until the move is over.

Yes and no. Those legends are moving size. Not sure Cutten is swinging that much.

I'd go with OTM LEAPS for the trend then regular OTM puts for bear corrections.

Position sizing = 50-100% of capital. Depends on preference. If I knew I had an 80% hit rate with a max 30% drawdown, bet the farm. How long do you plan to live? 8 years is a long time.

Long dated options have great theta which should provide a nice buffer if fundamentals go south and the trade doesn't work out. This helps keep drawdown to a minimum when the trade is at it's most precarious (beginning). JMO.