There were two significant gross position adjustments in the reporting week ending December 9. The gross short euro position was trimmed by almost 10% of 21.3k contracts to 195.2k. This brings the decline to 44k contracts since the gross short position peaked in early November. About 10.5k yen contracts were covered, leaving 142.2k gross short yen contracts.
Reflecting the diverging price action, speculators reduced gross short euro, yen, sterling and Swiss franc positions and added to the gross short dollar-bloc currencies. Aside from the yen and sterling, gross long positions were grown.
The net short speculative currency positions were mostly reduced. The two exceptions were the Australian dollar futures where the net short position grew to 45k from 41.1k contracts. The net short Mexican peso position rose to 48.6k contracts from 43k.
The net short speculative 10-year Treasury futures position swelled to 201k contracts from 163k. This was clearly more about longs taking profits rather than shorts selling into the rally. The gross long position fell to 305.7k contracts, a decline of 38.7k. The gross short position rose by 100 contracts to 507.1k.
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Trend Following with Managed Futures: The Search for Crisis Alpha (Wiley, 2014) by Alex Greyserman and Kathryn M. Kaminski is an academically rigorous book with a practical bent. Although on the surface it appears to have a narrow focus, in reality it covers a broad spectrum of important but often overlooked investing concepts. Even readers who have no real interest in managed futures can learn a great deal from it, especially if they have some familiarity with financial statistics.
The authors start with an 800-year historical perspective and then discuss trend following basics, theoretical foundations, trend following as an alternative asset class, benchmarking and style analysis, and trend following in an investment portfolio.
Here I’ll simply highlight a couple of ideas that are central to the book’s thesis.
Let’s start with the notion of crisis alpha. “Crisis alpha opportunities are profits that are gained by exploiting the persistent trends that occur across markets during times of crisis.” (p. 145) Viewed in the context of the adaptive market hypothesis set forth by Andrew Lo in 2004, “for both behavioral and institutional reasons, market crisis represents a time when market participants become synchronized in their actions creating trends in markets. It is only the select (few) most adaptable market players who are able to take advantage of these ‘crisis alpha’ opportunities.” (p. 73)
1. To the extent there was a pattern in the latest Commitment of Traders report for the period ending December 2, it was that there were only minor position adjustment. Of the 14 gross currency positions we track, only two changed by more than 5k contracts. The gross short euro position was reduced by 6.5k contracts to 216.6k. This is about 23k contracts lower than the recent peak in early November. The bears grew their gross short peso position by 14.3k contracts to 73.2k. This is a record gross short peso position. The peso fell about 3% in the three sessions since the Commitment of Traders report on the back of weak data, official comments, the drop in oil prices and the resurgent dollar.
2. Whereas the market has marginally reduced its short euro position, it has continued to extend gross short yen positions. They are short 152.7k contracts. This is a new high for the year, though still below (~4.5k contracts) the high from the end of last year.
The speculative net short US 10-year Treasury futures position more than doubled over the last reporting period to 163k contracts from 73.3k the prior period. The bulls took profits on 42k long contracts. Recall that yield fell to 2.15% on December 1. They are still long 344.4k contracts. The bears added 45k contracts to bring the gross short position to almost 507k contracts. The yield finished the week just above 2.30%.
New Zealand’s stock exchange operator announced on Thursday it will launch a global butter futures contract next month.
From the announcement:
Butter futures are a global risk management tool for participants operating in the dairy commodities industry. The contracts will trade off the underlying price for unsalted butter on the GlobalDairyTrade auction platform.
NZX’s head of markets Aaron Jenkins said the annual global trade in butter is worth more than $2.5bn and the move would help New Zealand manage global price volatility. He added:
Trading volumes on NZX’s Dairy Derivatives market are on track to increase by more than 125 per cent in 2014, so it’s the right time now to expand our range of contracts we have on offer.
They trade too much. The edge that small traders have over institutions, is that they can pick trades carefully and only trade the best trends and entries. The less they trade, the more money they make, because being picky gives traders an edge.
Unprofitable traders tend to be trend fighters, always wanting to try to call tops and bottoms. They eventually will be right, but their account will likely be too small by then to really profit from the reversal. Money is made by going with the flow of the river, not paddling upstream against it.
Taking small profits quickly and letting losing trades run in the hopes of a bounce back, is a sure path to failure. Profitable traders understand their risk/reward ratio; big wins and small losses. Being quick to take profits while allowing losses to grow, is a sure way to blow up your trading account.
Wanting to be right more than wanting to make money will be a very expensive lesson. A trader who doesn’t want to take losses will most certainly balk at reversing his position because it signifies personal failure. A profitable trader is not afraid to get on the right side of the market to start making money.
Unprofitable traders trade too big, and risk too much to make too little. The biggest key to profitability is to avoid big losses. Your wins can be as big as you like, but the losses must be limited.
Unprofitable traders watch BLUE CHANNELS for trading ideas.
Unprofitable traders want stock picks, while profitable traders want to develop trading plans and systems.
Unprofitable traders think trading is about being right. Profitable traders know that profitability is about admitting you are wrong quickly, and being right as long as possible.
Unprofitable traders don’t do their homework because they think there is a quick and easy route to trading success.
Unprofitable traders #1 question is how much they can make if they are right, while the profitable traders #1 concern is how much they can lose if wrong.
All market behavior is multifaceted, uncertain, and ever changing.
“I am employing a robust, positive expectancy trading model and am appropriately managing risk on each and every trade. Losses are an inevitable and unavoidable aspect of executing all models. Consequently, I will confidently continue trading.”
Denial of loss and uncertainty is extremely destructive because it prevents us from thinking in terms of probabilities, planning for the possibility of loss, and consequently from the necessity of consistently managing risk.
If we view markets as adversarial we cut ourselves off from emotionally tempered, objective solutions to speculation (opportunities to profit)
Blind faith is no substitute for research, methodical planning, stringent risk management, playing the probabilities, and unwavering discipline
Depression is a suboptimal emotional state because it allows past losses or missed opportunities to limit our ability to perceive information about the markets in the present
We are not our trades; they are merely an activity in which we are engaged
Greed is linked to fear of regret, which is the greatest force impeding a trader’s performance outside of fear of loss
Market offers limitless opportunities for abundance
Trading biases prevent us from objectively perceiving reality, thereby limiting our ability to capitalize on various opportunities in the markets.
1. Position adjustments were minor in the Commitment of Traders reporting week ending November 18. There were only two gross positions adjusted by more than 5k contracts.The gross short yen position grew 9.2k contracts to 139.1k. The gross short sterling position rose 12.1k contracts to 65.7k.
2. The net short position in the US 10-year Treasury futures rose to 127k contracts from 112k. This was the result of a small add by the longs (8.3k contracts to 398.9k) and a larger sale by the shorts (+23.2k contracts to 526.2k).
3. Given how closely the capital markets are watching oil, we note that the speculative long position in the futures market eased 21.5k contract to stands to 255.3k. The gross longs were culled by nearly 38.5k contracts to 403.7k. Almost 17k gross short contracts were covered to leave 148.4k.