We are now up about 10%, in a PNL situation not much different from that of a few weeks ago (where we reached +169.8K), but, this time, after an additional ongoing "investment" in natural gas (NGK6) and crude oil (SCO). Clearly, the DD phase in between had the purpose to create a new "investment" to rise further our current "potential PNL" (the G-L), which is now around 400K. So, in summary, we are back to where we were, but now with a "potential" for further new profits, these new possibilities being created obviously by the negative PNL fluctuations in a "load" zone. I have also closed most of the profitable layers of CL, leaving active only a short one, which I let free to play "against" SCO. In the meantime, I have also sold a few CL calls, just in case the profit on SCO keeps delaying to come, and we certainly want our time to be valued (also because these short ETF positions charge nasty interests, and the futures contract CL is constantly "sliding down" through contango).
Today we have reached a new "high watermark", with PNL currently fluctuating above +170K (and we are currently using only 400K of maint margin). I have momentarily shut down most of the profitable layers, to focus our resources on the ongoing "investment" on NG. At same time I am slowly loading up on DGAZ (not making the same "blunder" as we did SCO: it's enough to make a mistake once!) NUGT is also "promising" to shoot up further, so better be prepared and start loading up.
We end up our week, after about 25 weeks of trading, with PNL up to about +205K. Maint. margin is currently only 365K and our net liquidation value around +1.7M. Most of the time we have been using a fraction of the available capital. If I had been more careful with SCO, this would have been a nice result overall, but anyway this experience has also been useful to further refine some aspects. We have now a large load on natural gas, which poses both an opportunity, as it can rebound, and also a challenge, as we need to fight with the huge contango working against us, but we are fully equipped to do so with our player mechanisms, and in fact we have actually almost recovered the contango of the last rollover. We will see what happens next week. We have spent so far around 16K in commissions for about 4,800 (lmt) fills. (We have probably been charged some nasty interest (surely more than 10K) on our short ETF positions. We will check that on the broker report.)
I got the broker report for the period up to march 4 (Friday), just in case you may be interested in looking at all activity in detail (attached as zip file). (This time the most remote date the IB report generator offers to select is Sept 10 2015, instead of Sept 7 2015, as it did before: I have no idea why.) From the report: we can see that we have been charged around 12K just for interest, while the commissions for the whole period are 16K. Right now (elapsed: 181.13 days) the Net Liquidation is 1,735,734.88 USD we are, at this moment, up +210,560.68 USD, a 13.81%. We still have a large "investment" on natural gas, which has to "come back home":
Along with the broker report, let's summarize a few points of the approach used so far in this illustration. Instruments and approach We have been focusing here mainly on Futures and ETFs (lately also considering their options). As to futures, we have been focusing on energy, metals, indexes, and also tried out some agricultural (the "weakest" so far). They have been traded algorithmically by using multiple overlaid long/short layers started on suitably spaced "corridors", and superposed long/short players. For ETFs, we have been focusing mostly on leveraged instruments which, directly or through correlations, behave "inversely" with respect to the mkt. This part has been carried out mostly through "enqueued orders" as entries (while closing can be done either by automation or through "enqueued orders", or manually, as preferred.) Lately, we have also been adding to our games some futures options to play in combination with the position taken algorithmically (we have seen possible uses of various possible option configurations, such as what we called "player anticipation", "covering", "protecting", etc.). (Clearly, one could also integrate with stock related instruments (and their possible dividends), in which case I would mostly go based on sound companies with low price (undervalued security), and mostly long position, say similar to WB's approach.) As to the algorithmic game played on each layer, we are using long/short players which are simultaneously scalping and hedging. We continuously store trading information in order to be able to recover the hedging orders ("stops") as well the rollover orders (to recover contango/backwardation). To be "profitable" in the long term a layer will need most of its players to be able to close, which requires, at player level, either that the player is trading in the "right" direction, or that at some point in the future, the price reverts to the entry point until the player can close. While this is "guaranteed" (in an infinite time horizon) for most of the theoretical models which make sense to describe the mkt, in practical terms there can be good reasons why the rate of player closing is not enough to "catch up" with the unrealized, within our lifetime. One of such reasons is for instance a prevalence of players open against some structural drift or other forms of decay (e.g., if you insist shorting the mkt indexes, it's quite likely you will not do well in the long period, or, if you insist in going long on leveraged inverse ETF, you may never come back from the "underwater" word, as conceptually the price may actually be "sliding" to -infinity, even tough the behavior is actually "masked" by periodic reverse split events, etc.). Trading information and long-term drifts Central to our algorithmic treatment, we have been storing and using the trading information, the concepts of layer and player. It is also crucial to recognize the main long-term "forces" which drive our instruments, such as possible "structural" drifts, contango, backwardation, decay. In fact, since they represent the main "determinants" over the long term, it is impossible to survive long time in the mkt, without taking them into account. In more conceptual terms, within this approach, failure to include them would mean that, while we do store trading information, we would not be able to use most of it, because the players holding it, would in practice often remain permanently "out of reach" or scope, and therefore this is practically equivalent to losing information, which is the ultimate reason, and actually (in my personal view) the definition itself of a trading "loss". Our edge has been essentially the creation of a "statistical drift" within the PNL curve, based on the accumulation and use of the trading information, the incessant scalping action and various mechanisms to recover hedging orders (stop) and rollover orders. The positive PNL drift (essentially represented by the slope of the G-L curve) is opposed by a constant and powerful negative drift composed by various components such as, first of all the hedging orders (approximately corresponding to "stops" in a more naive sense), the mkt sliding up/down (through drifts, contango, backwardation, daily rebalancing, decays or a mix of these) in situations to practically cause some of our stored information to remain permanently unused, the trading expenses, interests and other various fees. As we have anticipated, the positive drift of the PNL is fed by various components, mostly: - Continued scalping action - Hedging orders (stops) recovery mechanism ("player superposition") - Contango and backwardation recovery mechanism - "Decay" of the leveraged ETFs - Time decay / volatility drop of possible short options - Possible dividends The negative component is fueled mostly by: - Hedging action of players - Loss of information stored in "castaway" players which remain "stranded" and practically excluded from the algorithmic game, due to possible instrument drift or decay (if not properly taken into account with the "layer contraints") - Contango/Backwardation, rollover expenses, where not recovered - Time decay / volatility increase of possible long options - Commissions - Short interests - Possible negative dividends Capital and diversification wrt to price A main ingredient is also to gradually distribute capital over all the exploitable trading range, and the capability to hold on while the unrealized fluctuates and we carry out our scalping action, which also means that it is essential that suitable risk capital is employed in the process. While instrument diversification appears, in theory, a reasonable concept, in practice, it turns out pretty clear that diversification through price range is actually far more important than instrument diversification (because various correlations, eg. mkt/crude oil recent "lockstep", often make instrument diversification work more against us than in favor of a "smoother" PNL curve). The gradual allocation and the fact that we need to be prepared for rather large adverse PNL fluctuations (but anyway "bounded" by practical limits or by structural drifts) also signifies that the concept of compounding cannot be applied in a deterministic sense, but rather statistically over a long period. There is, however, the continued scalping action which provides fuel to fight the adverse fluctuations and the negative components, an this can vary greatly depending on the instrument microstructure (choppier and more volatile mkts, like energy and metals, would generally generate more fluctuations and scalps). Clearly, this contribution is "masked" (especially in the short term), in the PNL curve, by the fluctuations of the unrealized component of the PNL, but it is always present. For instance, in our case in about half year the scalping action has generated an amount equal to about 1/3 of the capital, and most of the time we have been using only a fraction of the capital (of course, we needed the capital to hold on the peak DD however). This is also a reason why good risk capital is needed in this context, along with a working understanding why some degree of DD is always necessary.
Today I made the rollover for NKD. From NKDH6 to NKDM6: backwardation is pretty small, in fact the open (order) and close (player) order practically "overlap" on the screen: it turns out that this is instrument does ok in terms of scalping, quite similar to ES, actually, and, in fact, the realtime "codirection" between these two instruments is pretty high (+.95). PNL up to +228K, we are holding on the NG "investment". This time I am going very cautious with DGAZ (even excessively) with a very moderate load, just to fight the contango. SCO has closed most of its load, and it is not a Damocle's sword anymore (case closed):
Breaking another high water mark this morning, with PNL peaking to +270K, obviously mostly thanks to NG. CL has only one layer active, as I closed all the profitable ones and it's short, so it's "aligned" with the contango, and feels good. Agricultural stuff has been mostly a "waste of time", as quite "slow" and with not many exploitable fluctuations, and therefore not providing much scalping activity, compared with the other ones. I would rather remove them all and just keep ZW as a representative of the sector. We might give a try to some FX futures too (we have been "watching" CHF without trading it, which anyway has been showing pretty low volatility, even lower than agricultural stuff, so probably not really suitable too for our purposes). Note, however, that volatility alone is not an accurate "predictor" of scalping activity success. In fact, for instance ES has an avg realtime volatility even slightly smaller than ZW, but it performs much better in terms of scalping. It appears that the microstructure itself of an instrument tends to "explain" better the scalping activity, and some instruments do tend to be almost always better than others. (This is probably related with the kind of "long-term forces" the instrument is subject to, the actual trading activity, and also the market making algorithms.)
I have made a rollover from NGK6 to NGM6, This might be a bit early, but when we see some spike up (for instruments in contango) in general it is better to take advantage of it, if the current spread for the next contract is not too bad. Contango is large, and this makes NG a bit problematic to trade long. So it is important to use the "rollover recovery" mechanism here and be prepared to some "position overload". In the meantime we broke another PNL high record peaking at +308K, while currently we are fluctuating around +267K: Maint. margin usage is currently very low, we are just taking around 177K (so less than 10% of current capital). Looking at the historical charts, today I had another idea for some additional trading actions we can perform and I think can improve significantly our long term results. I will explain that in a next post.
Not much happening. We are currently in positive PNL territory, with profits around +295K (after 188 solar days trading and over 5,100 limit fills, 17.6K commissions, over 12K interest). Current maint. margin is around 181K and most of our investment is now on natural gas and related instruments. To recover the NG contango I am using both the "rollover recovery mechanism" of the trading engine and also a short position on DGAZ. For CL, I have currently 2 layers active which are currently short, while SCO is almost flat (it has still a small short position). Agricultural stuff has low volatility and "going nowhere" (comparatively speaking), I will shut probably them down at the first chance, when the corresponding layers turn profitable. I have shorted a few CL options, to grab some time decay, while the NG options appear not really suitable for a similar play.
These last couple days we had a significant decrease of PNL, which is now at about +210K (it peaked before at +308.4K), while, at the same time the G-L ("gain-loss", our "potential" profit) has been rising quite a bit. This is mostly due to some "loading up" on CL. In fact, while a few weeks ago we had a large long position, now we are just in the opposite situation of growing up a good short position on a couple layers I left active. That is not worrying at this time, and actually I usually feel better being short on these kind of instruments, as long as the contango works long term for us. (Further, given the position, we can start also hammering with short puts to grab some extra profits.) Also some Ag futures (eg. soybean oil) has been pulling up and loading position, so this means we need to be more patient and wait longer to be able to close them. Metals seem to be heading up and I am slowly loading up on NUGT, while I have reactivated one of the SI layers.