Jan

20

Nat Gas, from George Coyle

January 20, 2012 |

The destruction of Nat Gas continues and at these prices I am inclined to wonder if/when "value" players might enter the fray. Nat gas has been down 7 days running examining close to close prices. From 1/2000 to 12/2011 this has happened 22 times (out of 3008 days). The odds of it going up from yday's close to the close in 5 days are 50/50 but the magnitude of the losses offset those of the gains historically. Interesting that even after so many down days that history expects continued losses in the next few, and today's price is acting accordingly. If modeling this with a stop loss, positive expectations can be found but the frequency of winners decreases significantly from the 50/50 as the stop is often triggered in the following days. Aside from being a mean reverting method vs trending, this strikes me as something the turtles might have employed based on Curtis Faith's books. A system which takes a bunch of small losses and offsets the small losses with few large gains. To the statisticians on the list, what are the detrimental impacts of pursuing such a strategy?


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3 Comments so far

  1. Barry on January 20, 2012 10:27 am

    Problem with the strategy is it doesn’t take into consideration what’s driving this action. To me it seems to be the warmer then expected winter has decreased demand for heating gas coupled with the huge discoveries of nat gas around the country briinging new supply online while the producers are hedged out for years so they don’t have if the price drops below the cost of production…they got insurance.

  2. Gary Phillips on January 20, 2012 10:44 pm

    The T_rtles were systematic trend followers. They were certainly not bottom pickers, nor were they mean reversion traders. They had an established set of rules,that told them when to buy and sell (new 4 week high /low), how many (2% of equity determined by a volatility based stop), and when to get out (two- week price breakout in the opposite direction of the entry breakout). They were certainly not bottom pickers, nor were they mean reversion traders. They also had certain "filters" that helped increase their probability of success, along with a longer term trading system which prevented them from missing moves, which used an eleven-week breakout (fifty- five days) for an entry signal and a four-week breakout (twenty days) in the opposite direction for an exit. While it seems like shorting natty down here, would be like picking up nickels in front of a steamroller, the T_rtle system would have them doing just that.

    Of course,the person you ought to consult with about trying to pick a bottom in natural gas, is Nick Maounis of Amaranth Advisors.

  3. Barry on January 22, 2012 3:55 pm

    You would be going against boon Pickens latest call on nat gas, that it will trade to a 1 handle. One has to has oneself why is Pickens making such public predictions?

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