HuggieBear's Official 2011 Thread of Market Domination

Discussion in 'Journals' started by HuggieBear, Jan 8, 2011.

  1. While last years thread was reflective of my road from ruin to redemption, and contained all the best human foibles, including no shortage of greed and avarice, this years thread will be a much tamer affair.

    Herein I will document year 2 of my 5 year plan to become an individually wealthy (and retired) investor and trader. First, my goals for this year:

    1) Targeted return of 30%+, but no less than 20%
    2) Outperform the S&P500 Index monthly
    3) Suffer no Max Drawdown worse than 20%
    4) Lose no more than 10% in any one month

    To achieve this year's goals, I will continue with my latest strategy, which represents my 3rd in the last 12 months. This year I will solely pursue the following:

    1) Trade a mechanical commodity futures swing trade system (holding period 1 week to 8 months)
    2) Trade a mechanical ETF swing trading system (holding period 1 week to 2 years)
    3) Selective hedging operations to manage overall risk and correlated risk
    4) A small position in DecisionMoose signals (10% of portfolio)
    5) Extremely selective discretionary swing trading (almost a negligable part of strategy, but very satisfying)

    At minimum, this will be an interesting exercise in the use of mechanical systems. Most of my success last year came through discretionary swing trading, which I have decided to abandon due to having inadequate time to focus on that (while having kids and a full time job). I decided I need a a system with a longer time horizon, with longer holding periods, that would incur less commissions.

    Here are the basic stats on the two systems I will be trading:

    ETF Long Term Trend Following:

    2003-2010 36% Car MDD 21%
    2010 35% Car MDD 8%

    Commodity Futures Swing Trading:

    1990-2010 39% Car MDD 27%
    2010 53% Car MDD 10%

    I mostly traded and tracked real time the ETF system last year, and the results were consistent in practice with the current back test results. The futures system I developed a couple of months ago and is more of an unknown quantity.

    Part of my reasoning for developing and trading this system is my belief that we are probably entering a long term commodities super-cycle driven by demand from emerging markets. I know that was the theme last year, but I'm talking about a 20 year cycle of real scarcity, not risk-on based investing by investment banks. I want to profit from that cycle, and I believe this is the most profitable way to do so.

    The biggest unknown, and risk, in trading both of these systems simultaneously is the risk of being overleveraged and too highly correlated, resulting in a worse drawdown than either system has experienced individually. I have not done, and don't really know how to, marry up the backtested volatility of both systems to understand what kind of MDD I would have incurred if running both simultaneously.

    To mitigate this risk, I will be hedging with options where possible and I may choose to skip certain trades if I feel the instruments are too highly correlated and putting me too much at risk.

    I realize that is probably less optimal than simply using appropriate position sizing, but to trade the futures system it is a necessity (as the nature of the system and high leverage in futures exposes me at even the smallest position size).

  2. Off to a solid start...

    Performance for Week 1:

    Weekly % Return = 1.3%
    Current DD = -4.5% (carryover from last year)
    2011 Total Return = 1.3%

    Let me start by saying I am in a range of positions nearly all of which make me uncomfortable. My perspective is that the market is overbought, and it won't take much of a catalyst to set if off to the downside.

    That said, the systems said buy, so i bought. Some of my positions i've been holding for a few months already, while others were bought in the last few weeks. I've had no new signals in 2011 as of yet, so it's steady as she goes for the time being.

    Here are my current holding per system-

    ETF System:

    EWZ (Brazil)
    FXI (China)
    VNM (Vietnam)

    Futures System:

    Long Wheat
    Long Soybeans
    Long GB Pound
    Long Nikkei

    I currently have an active hedging regime in place, which includes collars on FXI and EWZ (EWZ is already ITM on the downside). Also, I own small put positions in FCX, SPY, SLV, and DBA.

    It may take me a while to perfect my hedging approach, given that I am hedging through correlated instruments in some cases.
  3. Helluva start to 2011

    Performance for Week 2:

    Weekly % Return = +2.6%
    Current DD = -1.9% (carryover from last year)
    MDD = -1.9%
    2011 Total Return = +4.0%

    If things carry on at this pace, I'll double my money this year. Now, I know thats not going to happen, therefore logic dictates that I am due for a rough-patch/drawdown.

    A lot of my positions paid off last week. I was long soybeans and wheat, and soybeans in particular paid off big after the ag report.

    My Vietnam position also was off to the races.

    This coming week I have a new signal to go long Spain (EWP). I will be taking a position there but we'll have to see how large, I still need to size it out.

    I may take a speculative short in coffee, partially to hedge how ridiculously long I am everywhere.

    My hedging operations are doing nothing but costing me money. This has not been a good time to hedge. I will continue with it, however, as a risk reduction strategy, safe in the knowledge that it will pay off.

    I believe we are on the cusp of a decent correction (~10%). I expect it to start within 2-3 weeks. If and when it does, I will likely take a pretty sizable loss. I know we are on the cusp of a correction because my friend's broker from Merrill Lynch told him it was time to get long recently. He has the most uncanny ability to pick tops and bottoms, it is truly unbelievable.

    In 2008 he let my very conservative friend ride the entire market decline down, only to finally sell him out at 7100 on the Dow. He bought him back in at 10200, only to sell him out again at the bottom in september around 10k. If I gave you a chart, 1 hour, and put you in the future you couldn't pick the turning points any better.

    Anyway, he says get long, so watch out! He hasn't missed yet!
  4. i was wondering why would you want to get in to ewp after it went up 14 to 15 % in 5 days , do you realy expect it to go much higher ?
  5. DDMaster -- i am running a mechanical system and it said to buy...Unfortunately for me, i did not take the signal for the very reason you pointed out.

    EWP was up another 6%+ last week, so i made a big mistake in not taking that signal.
  6. A possible turning point....

    Performance for Week 3:

    Weekly % Return = 0.0%
    Current DD = -1.9% (carryover from last year)
    MDD = -1.9%
    2011 Total Return = +4.2%

    This week I was, at two different fleeting points, out of drawdown. Only three short weeks ago I was in a nearly 10% drawdown which really strung, and I'm frankly amazed to have recovered so quickly. More evidence, I believe, that my methodical and diversified approach is paying off.

    Unfortunately, I ended the week flat because nearly every investment I own was down 2%-3%. I managed to end flat because my hedges covered a good chunk of the losses, and I went short the US market when goldman missed. AS soon as I saw people selling the news, I ratcheted up my discretionary trades on the short side to offset my primary portfolio losses.

    I enter this coming week with no hedges whatsoever. When all of my options expired friday I couldn't bring myself to overpay for Feb puts at inflated prices (given the late week downside action).

    Monday's have generally been good in this market, so I am playing the odds that we get some relief on MOnday, and I can enter my hedge trades at better prices. Obviously, if Monday ends up being a big down day I will take a major blow. Fingers crossed.

    Lastly, I did not take my EWP (Spain) trade last week because I was concerned about the volatility and prior weeks runup (it was up 16% the prior week). Big mistake as EWP was one of the best performers again last week. Need to learn to take every signal, no matter what.

  7. Absolute disaster strikes....

    Performance for Week 4:

    Weekly % Return = -9.5%
    2011 P/L = -5.7%
    Current DD = -11.1% (carryover from last year)
    MDD = -11.1%

    It would not be an exaggeration to say that everything that could go wrong has gone wrong.

    First, all of my system trades got effectively murdered this week. India, China, Brazil - which are my core holdings - were down between 3% and 6%. All in all, system trades accounted for about half of my losses this week (approx. 5%).

    I compounded the situation with some terrible discretionary trades, probably accounting for another 5%. Even though it was a really bad week, it was all an expected normal drawdown, except for this discretionary 5% loss. This was a major failure on my part driven simply by overtrading. This would make the 3rd time in 10 months, and just goes to show its always a risk.

    Unfortunately, simultaneous with this week some job/income uncertainty has popped up as well, and this is going to have a major impact on my trading. Basically, due to this new uncertainty, I need to follow a much more risk-averse approach to trading (until such time as the uncertainty lifts).

    I've been running two systems that independently have had maxDDs in the 20%-30% range, with the inherent risk that the MDD could be much greater when combined. I was willing to do this as I was swinging for the fences and could afford the risk.

    At this point, I can no longer do so -- and therefore I am going to abandon the commodity futures system for the time being and focus on the longer term ETF system. I can much better control position sizing and hedging with that system, and therefore will be able to ensure I don't risk a major meltdown.

    Going into net week, i expect to lose more money. My position in INP, which crushed me last week, will be closed at the open on Monday morning. My other positions in FXI and EWZ are almost at their stop point. I' ve got several open futures positions I need to close out as i wind down system 2.

    Anyway, not how I wanted to start out the year, but I've been in much worse holes than this one. The current state on world markets makes me feel like the next few weeks could be bleak, but I have confidence that I can trade my system without too much more damage before I start to climb out of this drawdown.

    Hopefully Monday isn't a total worldwide meltdown or my hole could get quite a lot deeper before all is said and done.
  8. Really taking it to the chin....

    Performance for Week 5-6:

    Weekly % Return = -0.7%
    2011 P/L = -6.4%
    Current DD = -11.7% (carryover from last year)
    MDD = -11.7%

    Performance above covers the last two weeks, as I was at the super bowl last weekend. I had recovered a few percent only to lose it all in the last few days.

    One could argue that 11.7% DD is not all that big a deal, but I am trading with so much more capital this year that my cash loss YTD is nearly equal to my entire 57% gain from 2010. It is definitely testing my mental fortitude.

    I have been long Brazil/China/Vietnam and short the US market. really the worst possible positions one could have on over the last couple of weeks. My stops triggered on my CHina position so I'll be liquidating that on Monday.

    In order to reduce the chances of an absolute meltdown, I'm going to reduce my position sizing until I get back out of drawdown. Further, I have some additional trading capital to inject into my account (about 25% of my current account total) and I've decided to hold that aside also until i get out of drawdown. Interesting tactics not proven out through my backtesting but it just seems prudent at this moment.

    My goals for the year are now much more modest -- I feel that reasonably shooting for a 10-15% gain is probably appropriate. Might be tough with the markets being overextended, but you never know. The main thing, at this point, is to simply reduce my drawdown.

    I am still short the US market, mildly, and will look for a dip to exit this week. Until I am out of drawdown I will not be doing any more discretionary trading, except for some protective puts here and there on long positions.
  9. Really mismanaging my finances....

    Performance for Week 7:

    Weekly % Return = +1.4%
    2011 P/L = -5.0%
    Current DD = -11.7% (carryover from last year)
    MDD = -10.47%

    The good news, if there is any, is that I stopped losing money for at least one week.

    At the close of last week, my core holding in FXI hit my stop and i exited monday morning. The market obviously continued to melt up this week, and my position in FXI would have made another 1% had i held it. But i didn't. I lived by my system and I feel very content in that fact.

    This week, I got a reentry signal on FXI and also on TUR. Going forward, I will take each and every signal generated, no matter what. I fully expect FXI to meltdown, but i will take the signal anyway. I've ignored way too many signals during the last 12 months and the opportunity cost has been huge. This crazy market has taught me a lesson, and that lesson is that I am not better at predicting things than my system is.

    By Tuesday morning I will be fully invested across a range of risky markets. I could be out of drawdown within days, or i could double my drawdown. If i were a betting man, i would wager that i will dig my hole deeper. But, the last 12 months have proven that could be a good sign!

    I was lucky to be up last week in spite of VNM melting TF down, thanks mostly to Brazil and a long AUD play i had on.

    Still holding back a 30% additional trading equity injection until i at least get flat for the year.

    Cheers all,

    HB 3000
  10. In the wrong place, at the wrong time, doing the wrong thing...

    Performance for Week 8:

    Weekly % Return = -1.6%
    2011 P/L = -6.7%
    Current DD = -12.05% (carryover from last year)
    MDD = -12.05%

    A very very bad week, bringing me to an all new drawdown low. I am now down 12% from my peak, but only 6.7% for the year. For now Im going to focus on the 6.7 percent, as it seems reasonable and can at least get me back to breakeven on the year.

    My systematic trading did not go well this week. In particular, large positions in the turkey and vietnam ETF became immediate large losers. TUR was down more than 10% on the week at one point, so that is some volatility.

    I realize now that in designing my automated system I made a serious mistake. To increase the number of signals generated I broadened my list of ETFs beyond those which I backtested the system on. It probably would work out over the long term, but it is adding way too much volatility.

    This week I am decreasing the list of ETFs I use significantly, focusing on broadly diversified ETFs with a longer track record. This will reduce volatility, provide more liquidity, and also usually options will be available to hedge with

    I was down 7% midweek, so I was really lucky to escape with only the losses I ended up with.

    Hopefully there is some resolution in Libya over the weekend and i wake up to a giant rip-roaring monday morning with TUR and VNM up 10% or something. IN any case, I am selling those two positions at the open as the stops were hit this week.

    I will have positions remaining open in FXI and EWZ, and I have hedged them a bit to limit downside damage.

    Other than that, I'm looking forward to some more boring trading going forward.
    #10     Feb 26, 2011