Aug

14

 Spending hours on an airplane with nobody you know can make you crazy, enable you to do some serious thinking, or some combination of both. As I fly over the California coast I have been going over in my mind for the past five hours what the market possibilities are going forward.

I have been involved in investing and trading the global markets for 18 years now. I've really never done anything else, never wanted to do anything else, and through thick and thin, which included more than one trip to the welfare line and some really cool sports cars, never tried to do anything else. For at least seven of those 18 years the money I have been trading has been 100% my own, and for many of those years nearly all the money I had. This has given me a different approach from most, since trading other people's money while earning a 2% management fee or while taking in a nice salary while you hope something good happens can give a level of comfort I was not blessed with coming out of the gate. Whenever someone asks me how to learn to trade my response is that it's easy to learn — take every dollar you have, put it in a brokerage account, put it all on the line, and I promise you will learn very quickly how it works. I don't mean to be glib. It's just that this is exactly how I did it so I know of no other way.

I have spent these years reading hundreds of books on trading, investing, economics, economic history, statistics, psychology, philosophy, systems development and countless other subjects all with the hope that I could develop some kind of long term edge in the markets. Have I been successful? Only a lot more time will tell.

The largest position I have right now is long stock futures in the US. The method I use to manage money takes into account the current positions in the US futures markets to help establish risk/reward for me on individual positions. The belief is that when participants get skewed towards one side, the chance that a market will have a big move the other way increased substantially. This does not work every time, which is why I use stop losses on every position. This also gives me no edge on determining the path of a given move, which can be anything from a quick straight line move that lasts a few weeks before the participants react, to a multi-year choppy move before adjustments are made. I have had positions work that have had a path where they were initially very profitable, then pulled back 15-20%, only to resume the profitable path. These moves were not fun, but ultimately made a lot of money from entry to exit.

In mid-February I was getting indications that participants were way too long on the stock indices to be sustainable and I was expecting a sharp drop because of that. Surprisingly, after a two week drop in the market in late February/early March the participants went from very net long to very net short, which is the quickest I have ever witnessed this in 15 years of monitoring these data across 40 markets. My systems got long on March 14 and have remained that way since. Has this trade worked? Sure, so far. Does this mean I won't get stopped out? Not at all. This is by no means a magic system, but I stick to it because it works very well over time.


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