I am learning here. Want to add your style of trading to my list because I think I am good at it and you are really good. Predicted large fall but still lost money because of emotional sabotage - subtracted 20% from portfolio. Watching really carefully how/if market will reverse and see what effect fundamentals will have, and if I can actually pick the reversal based on psychology/fundamentals etc (which gives better risk/return - if possible of course).
I still have too much to improve. This year for instance I was on track to have a great performance, then I bought too many puts in late Mar/April. I should have never made a big bet there, the stock market was down too much(60% from peak), financials were down a lot too(closer to their correct values). There were contrarian signals all over the place in terms of bears. VIX was too high(bad odds to be long vol). I should have risked 3% maybe 4% of my networth, I instead risked about 15%. This was of course overconfidence. The six rallies or so the market/financials had since Oct 2007 all had failed quite quickly and put buyers cleaned up huge. I wanted to participate on that, and ended up doing at the very low. The overconfidence made me too biased and bought the story that bank stocks would be dilluted out of existence(either public or private dillution), then Geithner and the government showed they were starting the US zombie bank project and my puts are worthless(Although I still got a 2011 shot at CAL failling) Now I'm seriously integrating technical analysis based on price action plus contrarian signals in my position sizing algorithm. Everyone and their mothers like the front end of the curve in the story 'fed stays low for longer', thats why I cut back 50% of my fed futures(In particular the riskier ones for 2H 2010). By switching to eurodollar calls, I keep some exposure but avoid losing big in case everyone is wrong
Personal Income - M/M change 0.0 % Core PCE price index - M/M change 0.0 % Core PCE price index - Yr/Yr change 1.4 %(prior 1.5%)
I'm growing convinced that the best way to produce big returns consistently is to use the 'big bet' approach while favoring assets with positive risk premium(long equities, debt, commodities, fed funds during recessions) I suppose some people make great returns by making a series of small bets all year but every year I come across total nobrainers that will almost surely be winning trades(FNM FRE failure, MBIA short, long fed futures 2008, long commodities before the recession, long fed futures 2009, eurodollar 2010 calls and right now shorting/put buying in US equities once they show price action weakness) This shooting fish in a barrel method is not easy to use because it often means you need to wait many months, and see trades that you like but you know arent total locks, you are often tempted to jump on them but I find it the easier method to trade, one trade and you can have a good year, two or three and your year will be excellent
I mentioned a few trades that were shorts, big bets in these need probably to be smaller than otherwise(By some 50% or so). Niederhoffer talked about this in his book, you not just have the the broker commission, the MM big ask spread but you also have the historical risk premium(10% for stocks) working against you, this resembles betting on horse racing(as high as 18% vig against you), you need to be pretty darn sure you are correct before making a big bet. This is yet another reason why I made a significant mistake at 820 on ES in April by fading the rally through put buying in garbage stocks(airlines,banks,CRE stocks), my position should have been quite smaller because I had risk premium against me
Of course one will still make small bets trying to 'pickup' some returns in order to give you room to make the big bet. In 2008 my shorts gave me some gains which enabled me to make a big bet in fed futures in late 2008. In 2009 I tried the same thing, but my shorts cost me money(in particular GS), then one large bet I made turned out incorrect(that garbage stocks put buying, for expiration in Sep). It didnt had much room for a big bet but decided to do one anyway in fed futures after their crash, they have positive historical premium during periods of recession and there was simply almost no chance of a hike up to Feb 2010. Maybe my losses got to my head but it looked like such an absurd nobrainer that I just had to bet big, I wouldnt for instance buy lots of financials puts trying to get my money back because I couldn't be as confident but the fed futures trade was like picking up dollar bills in the ground
Of course the trick of the big bet approach is to be usually right. But if a trader is not correct more often than not, this big bet approach will just bring the long-run faster, the small bet approach will get him broke too, its just going to take a bit longer In my view the right way to trade in a multi-week time frame as being one of those 'campers' from Quake or Counter-strike games, you want to be the guy who just stands still in a hidden place just waiting for a sucker to pass by, then you pounce and take the easy frag. In the meantime your cash is sitting in the bank/brokerage earning interest(currently nothing) or making smallish bets. You also will be doing your homework and finding some kind of imbalance that is not currently being priced by the markets, I also try to find why(this creates the confidence to make a big bet) and hear opinions from people in the other side of the trade
I've been meeting my 'desire for action' by making small bets. Specially though options, this helps me to continue to camp waiting the big ones
Let me be clear here, I do have a big bet right now, on fed futures and eurodollar calls. I was referring to times where I dont. Todays intraday action on ES looks quite interesting, price is approaching both the 20MA and a uptrend line that started in the Meredith Whitney bottom. If we lose those I will start considering adding to XLF puts