Here is some loose, and I mean loose correlation analysis. USO started trading April 10, 2006. Take the closing price of USO which closed higher than GLD at the time. $68.20- $59.01 = $9.19. Now if you sold USO and bought GLD around this time you see they converge or cross 5/19/06 for what should be a $9.00 profit. This analysis only goes to 8/23. The widest spread seen in this data sample is $10.77. Convergence trades are interesting and can be applied to just about anything. They are as risky as anything else, just ask Long Term Capital Management. Risk is risk. Those guys got into trouble when the spreads got away from them. There are libraries full of this kind of trading, just some food for thought. Good luck!
Seasoned traders know the importance of risk management. If you risk little, you win little. If you risk too much, you eventually run to ruin. The optimum, of course, is somewhere in the middle.
Placing a trade with a predetermined stop-loss point can be compared to placing a bet: The more money risked, the larger the bet. Conservative betting produces conservative performance, while bold betting leads to spectacular ruin. A bold trader placing large bets feels pressure or heat from the volatility of the portfolio. A hot portfolio keeps more at risk than does a cold one. Portfolio heat seems to be associated with personality preference; bold traders prefer and are able to take more heat, while more conservative traders generally avoid the circumstances that give rise to heat.
The above paragraph was written by Ed Seykota. I don't think I could articulate risk any better than that.
USO
Date Close Date Close USO-GLD
4/11 68.2 4/11 59.01 9.19
4/12 67.84 4/12 59.43 8.41
4/13 68.82 4/13 59.5 9.32
4/17 69.79 4/17 61.09 8.7
4/18 70.75 4/18 61.85 8.9
4/19 71.85 4/19 63.75 8.1
4/20 71.09 4/20 60.96 10.13
4/21 72.81 4/21 63.2 9.61
4/24 71.01 4/24 61.65 9.36
4/25 70.64 4/25 62.78 7.86
4/26 69.54 4/26 63.65 5.89
4/27 68.7 4/27 62.96 5.74
4/28 69.62 4/28 65.09 4.53
5/1 71.5 5/1 65.16 6.34
5/2 72.34 5/2 66.55 5.79
5/3 70.22 5/3 66.46 3.76
5/4 68.32 5/4 67.48 0.84
5/5 68 5/5 67.99 0.01
5/8 67.88 5/8 67.56 0.32
5/9 68.4 5/9 69.68 -1.28
5/10 69.77 5/10 70.38 -0.61
5/11 70.3 5/11 71.03 -0.73
5/12 69.11 5/12 71.12 -2.01
5/15 66.63 5/15 67.41 -0.78
5/16 66.7 5/16 68.61 -1.91
5/17 65.7 5/17 68.15 -2.45
5/18 66.74 5/18 67.46 -0.72
5/19 65.57 5/19 65.58 -0.01
5/22 66.28 5/22 65.3 0.98
5/23 67.77 5/23 66.38 1.39
5/24 66.1 5/24 64.06 2.04
5/25 67.8 5/25 64.7 3.1
5/26 67.75 5/26 65.1 2.65
5/30 68.32 5/30 65.11 3.21
5/31 67.73 5/31 64.23 3.5
6/1 66.82 6/1 62.56 4.26
6/2 68.9 6/2 63.5 5.4
6/5 68.74 6/5 63.29 5.45
6/6 68.76 6/6 62.55 6.21
6/7 67.28 6/7 62.28 5
6/8 67.12 6/8 60.91 6.21
6/9 68.07 6/9 60.45 7.62
6/12 67.08 6/12 60.03 7.05
6/13 65.18 6/13 55.92 9.26
6/14 65.79 6/14 55.62 10.17
6/15 66.16 6/15 57.32 8.84
6/16 66.25 6/16 57.68 8.57
6/19 65.54 6/19 56.36 9.18
6/20 65.29 6/20 57.3 7.99
6/21 66.35 6/21 58.33 8.02
6/22 67 6/22 57.73 9.27
6/23 66.89 6/23 57.99 8.9
6/26 67.7 6/26 58.28 9.42
6/27 68.08 6/27 57.68 10.4
6/28 68.31 6/28 57.54 10.77
6/29 69.51 6/29 59.52 9.99
6/30 69.77 6/30 61.23 8.54
7/3 69.93 7/3 62.18 7.75
7/5 71 7/5 62.5 8.5
7/6 70.77 7/6 63.02 7.75
7/7 69.85 7/7 62.63 7.22
7/10 69.56 7/10 62.02 7.54
7/11 70.08 7/11 63.81 6.27
7/12 71.14 7/12 64.92 6.22
7/13 73.25 7/13 65.55 7.7
7/14 73.22 7/14 65.85 7.37
7/17 71.65 7/17 63.95 7.7
7/18 70.75 7/18 62.9 7.85
7/19 69.85 7/19 64.03 5.82
7/20 69.1 7/20 62.54 6.56
7/21 69.52 7/21 61.71 7.81
7/24 70.17 7/24 61.14 9.03
7/25 69 7/25 61.55 7.45
7/26 69.17 7/26 62 7.17
7/27 69.68 7/27 62.9 6.78
7/28 68.5 7/28 63.11 5.39
7/31 69.52 7/31 63.16 6.36
8/1 70.15 8/1 64.32 5.83
8/2 71.12 8/2 64.75 6.37
8/3 70.56 8/3 64.12 6.44
8/4 69.81 8/4 64.28 5.53
8/7 72 8/7 64.5 7.5
8/8 71.3 8/8 63.97 7.33
8/9 71.17 8/9 64.63 6.54
8/10 69.6 8/10 63.25 6.35
8/11 69.73 8/11 62.71 7.02
8/14 68.59 8/14 62.25 6.34
8/15 68.21 8/15 62.01 6.2
8/16 67.18 8/16 62.49 4.69
8/17 66.05 8/17 61.03 5.02
8/18 66.18 8/18 61.04 5.14
8/21 67.42 8/21 62.44 4.98
8/22 67.05 8/22 62.05 5
8/23 66.24 8/23 61.83 4.41
Seasoned traders know the importance of risk management. If you risk little, you win little. If you risk too much, you eventually run to ruin. The optimum, of course, is somewhere in the middle.
Placing a trade with a predetermined stop-loss point can be compared to placing a bet: The more money risked, the larger the bet. Conservative betting produces conservative performance, while bold betting leads to spectacular ruin. A bold trader placing large bets feels pressure or heat from the volatility of the portfolio. A hot portfolio keeps more at risk than does a cold one. Portfolio heat seems to be associated with personality preference; bold traders prefer and are able to take more heat, while more conservative traders generally avoid the circumstances that give rise to heat.
The above paragraph was written by Ed Seykota. I don't think I could articulate risk any better than that.
USO
Date Close Date Close USO-GLD
4/11 68.2 4/11 59.01 9.19
4/12 67.84 4/12 59.43 8.41
4/13 68.82 4/13 59.5 9.32
4/17 69.79 4/17 61.09 8.7
4/18 70.75 4/18 61.85 8.9
4/19 71.85 4/19 63.75 8.1
4/20 71.09 4/20 60.96 10.13
4/21 72.81 4/21 63.2 9.61
4/24 71.01 4/24 61.65 9.36
4/25 70.64 4/25 62.78 7.86
4/26 69.54 4/26 63.65 5.89
4/27 68.7 4/27 62.96 5.74
4/28 69.62 4/28 65.09 4.53
5/1 71.5 5/1 65.16 6.34
5/2 72.34 5/2 66.55 5.79
5/3 70.22 5/3 66.46 3.76
5/4 68.32 5/4 67.48 0.84
5/5 68 5/5 67.99 0.01
5/8 67.88 5/8 67.56 0.32
5/9 68.4 5/9 69.68 -1.28
5/10 69.77 5/10 70.38 -0.61
5/11 70.3 5/11 71.03 -0.73
5/12 69.11 5/12 71.12 -2.01
5/15 66.63 5/15 67.41 -0.78
5/16 66.7 5/16 68.61 -1.91
5/17 65.7 5/17 68.15 -2.45
5/18 66.74 5/18 67.46 -0.72
5/19 65.57 5/19 65.58 -0.01
5/22 66.28 5/22 65.3 0.98
5/23 67.77 5/23 66.38 1.39
5/24 66.1 5/24 64.06 2.04
5/25 67.8 5/25 64.7 3.1
5/26 67.75 5/26 65.1 2.65
5/30 68.32 5/30 65.11 3.21
5/31 67.73 5/31 64.23 3.5
6/1 66.82 6/1 62.56 4.26
6/2 68.9 6/2 63.5 5.4
6/5 68.74 6/5 63.29 5.45
6/6 68.76 6/6 62.55 6.21
6/7 67.28 6/7 62.28 5
6/8 67.12 6/8 60.91 6.21
6/9 68.07 6/9 60.45 7.62
6/12 67.08 6/12 60.03 7.05
6/13 65.18 6/13 55.92 9.26
6/14 65.79 6/14 55.62 10.17
6/15 66.16 6/15 57.32 8.84
6/16 66.25 6/16 57.68 8.57
6/19 65.54 6/19 56.36 9.18
6/20 65.29 6/20 57.3 7.99
6/21 66.35 6/21 58.33 8.02
6/22 67 6/22 57.73 9.27
6/23 66.89 6/23 57.99 8.9
6/26 67.7 6/26 58.28 9.42
6/27 68.08 6/27 57.68 10.4
6/28 68.31 6/28 57.54 10.77
6/29 69.51 6/29 59.52 9.99
6/30 69.77 6/30 61.23 8.54
7/3 69.93 7/3 62.18 7.75
7/5 71 7/5 62.5 8.5
7/6 70.77 7/6 63.02 7.75
7/7 69.85 7/7 62.63 7.22
7/10 69.56 7/10 62.02 7.54
7/11 70.08 7/11 63.81 6.27
7/12 71.14 7/12 64.92 6.22
7/13 73.25 7/13 65.55 7.7
7/14 73.22 7/14 65.85 7.37
7/17 71.65 7/17 63.95 7.7
7/18 70.75 7/18 62.9 7.85
7/19 69.85 7/19 64.03 5.82
7/20 69.1 7/20 62.54 6.56
7/21 69.52 7/21 61.71 7.81
7/24 70.17 7/24 61.14 9.03
7/25 69 7/25 61.55 7.45
7/26 69.17 7/26 62 7.17
7/27 69.68 7/27 62.9 6.78
7/28 68.5 7/28 63.11 5.39
7/31 69.52 7/31 63.16 6.36
8/1 70.15 8/1 64.32 5.83
8/2 71.12 8/2 64.75 6.37
8/3 70.56 8/3 64.12 6.44
8/4 69.81 8/4 64.28 5.53
8/7 72 8/7 64.5 7.5
8/8 71.3 8/8 63.97 7.33
8/9 71.17 8/9 64.63 6.54
8/10 69.6 8/10 63.25 6.35
8/11 69.73 8/11 62.71 7.02
8/14 68.59 8/14 62.25 6.34
8/15 68.21 8/15 62.01 6.2
8/16 67.18 8/16 62.49 4.69
8/17 66.05 8/17 61.03 5.02
8/18 66.18 8/18 61.04 5.14
8/21 67.42 8/21 62.44 4.98
8/22 67.05 8/22 62.05 5
8/23 66.24 8/23 61.83 4.41
