random rambling ruminations of a relic oct 2015

8/18/2019 Random Rambling Ruminations of a Relic Oct 2015

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Factor LLC ● Colorado Springs, CO 80920Web: www.PeterLBrandt.com ● Email: [email protected]

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October 11, 2015

Random Rambling Ruminations of a Relic

In this unscheduled series, I discuss items I believe have importance to the Factor Service and to trading, but don’t fit intothe structure of the weekly Updates and periodic Alerts. In the RRRR series I just start typing without really knowing where Iwill end up – thus the title of the correspondence.

Factor Tracking Account is terminated

The Factor Tracking Account will be terminated effective immediately. I began the Factor Tracking Account in June 2014 inan attempt to help Factor members obtain a better sense of my sizing and trade management processes. The FactorTracking Account has mirrored the trading of the Factor Proprietary account, but sized to a $200,000 level of capitalization.The Factor Tracking Account has fallen far short of its intended educational goals. I can provide better insight into tradesizing and trading management by periodically, as part of the Factor Update, detailing some ongoing trades or completedtrades. [Note: Factor will continue to keep a record of its proprietary trades. You may request a copy of our trading recordsfrom time to time.]

The Factor Tracking Account has never been used for promotional purposes. The existence of the Factor Tracking Accounthas not been mentioned on social media and only Factor members have received the details of the Factor Tracking Accountvia an Excel document without editorial comment. At this point I am going to editorialize. What do you think many of thetrading services on the blogosphere would do if their actual trading was similar to the results achieved by the FactorTracking Account? They would be screaming as loud as they could from the highest mountain. Herein is a differencebetween the Factor Service and so many of the slick trading services promoted on the blogosphere. I realize that there aregood times and there are tough times. If a person wants to crow during the good times, he or she must also be honest

during the bad times.

The past 16 months have represented some of the most fabulous futures and forex markets in years. The last time Iexperienced a 100%-plus return during a rolling 12 month period was 2007/2008. The final tally for the Factor TrackingAccount is as follows:

Currency futures $61,162Spot forex $56,397Metals and energy $38,974Traditional commodities $23,929Global stock index futures $36,485Equities $21,819

I am a momentum trader in that I trade pattern breakouts. Yet, I believe in the concept of mean reversion. Mean reversionapplies to individual markets as well as to trading performance. Traders who crow loudly about recent trading performancetypically end up on an extended diet of humble pie. I am under no illusion that the markets of the next 16 months will besimilar to the markets of the past 16 months. In fact, there already are substantial signs that forex markets are entering aperiod of sustained choppiness.

mailto:[email protected]:[email protected]:[email protected]:[email protected]


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The labeling of trades based on different time frame, risk management and trade management considerations

In my own proprietary trading I employ slightly different tactics for different contracts within a multi-contract position inthe same market. Thus, based on the exact same chart patterns I may employ an Anticipatory tactic (AU), Holding (Position)tactic, a Quick Profit tactic and a Swing tactic – or some combination of these. Based on emails I receive from Factormembers I have concluded that communicating tiered tactics within a multi-contract trade is confusing at best. My desire is

to seek clarity, not confusion. Hence forth I will simply communicate whether the Factor is long, flat or short in a particularmarket.

Strong Opinions, Weakly Held

All traders process trades intellectually and emotionally in different ways. As a trader I tend to have very strong opinions ona trade. But, I can desert that opinion at a moment’s notice. Some of my close trader friends are constantly amazed that Ican move from a fully positioned commitment in a trade one day and to a flat position the next day.

I express strong opinions about markets in the social media. There are times when I am very right, and other times when Iam very wrong. I would rather be very wrong on a market call than to constantly hedge my bet on trades in such a way thatI am never really right but never really wrong. I have no time to be wishy-washy.

Having a strong opinion about a market based on a clear and sizable chart pattern allows me take a meaningfully leveragedposition and hold t hat position as long as the trade remains in the black. But, when a trade wanders into the red, that’swhen my opinion becomes weakly held. I want my sentiment toward a particular trade and its contribution to profitabilityto be highly correlated. Yet, I understand that many traders cannot turn their sentiment switch on and off as quickly as Ihave learned to do. It is important for traders to know themselves. It is extremely important for a trader to be sensitive totheir own personality traits and quirks . “Strong Opinions, Weakly Held” is who I am as a trader – it may or may not reflectwho you are as a trader. You need to develop your own realities as a trader.

Modeling yourself after another trader

I have constantly harped that to be successful a trader must develop his or her own unique approach to trading. The Factoris not a trading or signaling service because I do not believe in signaling services. I am privileged to have belonged for yearsto a private online forum that includes some of the best traders in the world – a number of whom have been featured inthe Market Wizards series. This past week the subject of mirroring another trader’s style was a topic of lively discussionwithin the group. There were some remarkably insightful comments made that I want to share with you.

“ The interesting bit for me is that I don’t think you can change yourself to fit a strategy ; If YOU are the problem you eitherneed to quit trading or find a strategy that fits you (which is actually very circular, because if you can’t find a strategy whichworks for you over time then it means you should not be trading). I guess the caveat is if you are able to fundamentallychange who you are. I have never seen it done, I wonder if anyone else has? ” – Comment from one of the largest and most successfultraders in the world, former head of prop trading for a major global trading operation

“ Well put guys, I'm glad someone made mention of the 'circular' nature of the discussion and explained it better than I couldhave. I think this is precisely why 'style drift' among struggling traders is so common, because they think that a certain styledoesn't fit them so they keep moving from style to style, not realizing the real problem. It's a hard thing to tell someone'they're not cut out for something', but if what you guys are arguing is correct that seems to be the unavoidable conclusion for many. ” – Comment from a member of one of the most successful trading families in the U.S.

“ It is difficult to bleach a leopard ’ s spots and if you do, it is still a leopard. Style drift is essentially grail hunting for traders.You know, it’s that one thing that will make all the difference in this trade and the ones that come after. Experience tells methis is futile. Trading tools can be mastered through myelination, however self-mastery appears to be the where the questionof success or failure is found. A commitment to the process of controlling emotions is a life journey and not an event. It has tobe p racticed through prayer, meditation, routine, etc… If this is not tended to daily, failure is pretty much guaranteed. ” – Comment from one of the largest wealth managers in the U.S.



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Borrowing money to trade

A personal acquaintance mentioned to me this week that he is taking a line-of-credit on his home and using the funds fortrading. YIKES!!!!!!!!!!!!!!!!!!!!!!! Please, never do this. I am a strong believer that a trader should not use borrowed moneyor funds needed for living expenses for trading. If your goal is to trade full time for yourself, I am a strong believer thataccumulating enough money from trading for trading is a confirming sign you should be trading . If you cannot accumulate

enough money from trading to properly fund a trading account, then perhaps full-time trading is not for you.

The explosion of the coaching industry

There has been an enormous growth in the coaching industry. I am sure all of you have noticed this trend. I am veryconcerned about the expansion within this industry. There are some excellent trading coaches out there – most of them areone man services. I believe that 80% of the coaching industry represents a sham. If you run into a coaching firm that has anumber of coaches (counsellors, accountability partners, however named) and has been in business less than ten years, putyour money back in your pocket, turn, and run as fast as you can. This is ESPECIALLY true if these “trading coaches ” want toteach you how to be a day trader. I may have more to say about this subject later.

Day trading

I have discussed this topic before – and I must discuss it again. If you are a consistently profitable day trader, I give youcredit because you deserve credit. If you have unsuccessfully tried to be a day trader for more than two years, then it istime to try a different approach. A trader can be successful ONLY if he or she has an edge. In the age of the quants and HFCoperations, it is just difficult for me understand how a private speculator can gain an edge. My edge comes from mywillingness to hold positions overnight and over weekends.

Back-adjusted charts

I am often asked by Factor members why their charts look different than those published in a Factor Update. The reason is

called “back adjustments.” Two charts of INTC are should below. The chart on the right back -adjusts price for dividendpayments. The chart on the left is not back adjusted for dividends. In the case of the equity markets I can make the case forusing either type graph.

Not so for futures – I am completely opposed to the use of back-adjusted futures graphs. The Soybean chart on the leftreflects the actual prices of the nearby contracts. The Soybean chart on the right is back-adjusted to eliminate the spread



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differential between an expiring futures contract and the subsequent futures contract. I despise back adjusted futurescharts because they display prices that never existed. For example the back-adjusted price of Soybeans was a minus $2.62in 2001. I never use back-adjusted futures charts.

Trad ing other people’s money (OPM)

Some traders can trade OPM, other traders cannot. I am in the category of “cannot.” I have traded OPM – and traded itsuccessfully. I traded capital for Commodities Corp. from 1986 through 2002. That was the one major engagement I hadwith OPM – although in the case of CC the capital was purely proprietary.

The trading programs pitched by most Commodity Trading Advisors (CTAs) goes something like this:

Minimum account size = $500,000 (varies from CTA to CTA) Maximum margin-to-equity usage = 20% (or $100,000) Point at which most investors would call it quits = Loss of $125,000 (25%)

Management fee = 1% to 2% Incentive fee = 20% of net profits

What a rip-off!!!! Think about it.

The CTA wants to charge at least a 1% management fee on $400,000 that sits in the bank and is never placed at risk or usedfor margin (the other $100,000 being used for margin deposits). I call this robbery. The CTA will take 20% of profits with nodownside risk – in other words, the CTA wants a free call option on the client’s money. I can live with the incentive fee, butthe management fee is outrageous.

I currently trade money for two friends – but the relationship is very different than the typical managed futures accountarrangement.

The arrangement with my two friends is simple.

I just want them to keep only enough money in their account to meet margin requirements I would never charge them a management fee – I do not believe in management fees They must withdraw profits (if any) quarterly I retain 15% of the profits sent back The agreement is I will call them if I ever lose all of their money. Otherwise, communications about

markets is not allowed



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My trading day

I get many questions on what a typical day looks like for me. This is an important question because the PROCESS of tradingis extremely important.

Friday afternoon late

Print out a list of my positions and open ordersSaturday

Scroll through weekly charts of the “ long list ” of markets I monitor on a weekly basis. This typically includes about50 futures markets, 25 forex pairs and 25 equities.

Create a “ short list ” of markets of interest, including all the markets in which I am ent ering a new week with aposition. The “ short list ” usually included about 20 to 30 markets.

Scroll through the daily charts of the “ short list ” to determine those markets that could generate a buy or sellsignal the following week. From this review I creat e my “ active list ” which includes the markets in which I hold aposition and markets in which I will develop a trading strategy.

The “ active list ” typically includes 10 or so markets . I monitor this list carefully. I may even monitor this list inter-day for an asymmetrical trading opportunity.

For open trades, I review my target and stops orders to determine if any modifications are needed

For possible new trades, I determine an entry strategy, risk management guidelines and trade sizingSunday afternoon I begin to enter orders. A trader is nothing more than a glorified order enterer. For existing positions, I make sure a

GTC limit order exists to take profits. I use GTC 24-hour stops to protect trades in the most liquid markets – in lessliquid markets, I use day-order stops. I am willing to take the overnight risk in these markets.

For new trades, I use a combination of GTC 24-hour entry stops, day-only entry stops and close-only stops. Theclose is extremely important to me.

Monday through Friday – throughout the trading day I check on markets about every three or four hours just out of curiosity. Periodically I will be motivated to change

an order or make a trade. For the sake of full disclosure, trading action taken intraday has not positivelycontributed to my bottom line over time.

If I am filled on entry orders, I immediately place GTC 24-hour target orders and protective stop orders (either dayor GTC 24-hour orders)

Monday through Friday – usually about 5 AM Mountain I enter the day-only stop orders – these may be entry or exit orders.

Monday through Friday – usually around 4 PM Mountain I print a list of all my positions and all my GTC orders I review the daily chart of every market on the “active” list to modify any orders, if required

Friday afternoon late I get back on the same merry-go-round – and have been for 30 years

I would not expect you to have a process of speculation similar to mine. But the point is this – if you do not have anorganized and repeatable process for trading, you should not be trading.

Up until a few years ago I was an instrument rated private pilot. I stopped flying and sold my plane due to a neurological

condition. Pilots have detailed checklists and contingencies to which they must submit. In many ways being a pilot and atrader are quite similar. It is important for a trader to find a process of doing all that is necessary for his or her speculativeendeavors.



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The future of the Factor Service

I love trading. For me it is not work. I feel very fortunate to have earned my living through market speculation for more than40 years covering five different decades. My wife has been bugging me about retirement. Why would I retire? I cannot playgolf or climb mountains due to physical restraints. I have no interest in stamp collecting or gardening or traveling aroundthe world to hear the songs of different birds.

Trading is what I enjoy doing. Nevertheless, in about 50 months (January 2020), Providence willing, I will have tradedfutures and forex markets during six different decades. January 2020 is when my presence in the trading community andday-to-day involvement with markets will come to complete end – of course, if I make it that long.

I have increasingly been thinking and seeking counsel from traders and friends I respect about what the exit ramp for theFactor should look like – how do I want to spend the next 50 months? I have thought about the related issues from anumber of different angles. For example,

Issue 1 Should I expand the Factor membership in order to expose a greater number of traders to classical

charting principles?Or,

Should I reduce Factor membership by 95% (dropping 19 out of 20 present members through attrition) inorder to form a much deeper and interactive partnership with a very small group of extremely wellcapitalized traders? In this case I would remove myself from all forms of public awareness (blog, Twitter,StockTwits, etc.)

Issue 2 Should I continue to focus on the same type of trading signals as I have focused on since Jan 2014?

Or, Should I create informational flow to bring shorter-term patterns to the attention of Factor members?

Or, Should I greatly limit the focus of the Factor Service to 10 to 30 trade set ups per year and restructure

email communications accordingly?

I take very seriously the two options under Issue 1 above – I will not make a decision on this issue casually, although I dohave a slight leaning at the present time.

The decision on Issue 2 is 90% made – I just need to think through all of the implications before making a formalannouncement. The decision will be for the Factor to become significantly more selective in identifying candidate trades.How selective? I am not sure yet. What I do know is that I want the final 50 months of the Factor to be highlighted byidentifying and catching some really super moves. I will leave trading the shorter-term patterns to others.

plb

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random rambling ruminations of a relic oct 2015

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