Hedging should go further then hedging

To my mind one should approach every hedging strategy like it is your own money. What is the entry point, stop loss, take profit, time frame of the trade and the most importantly risk/reward ratio. What is a risk reward ratio? The answer lies in the question: how much you are willing to risk for a certain profit. Again, forget about physical side of the market and this absurd idea that if you loose on your hedge then you win on your physical exposure. This is a loss in the end...

Traders normally prefer to risk $1 in order to have $3 of potential gains. Mathematics is simple here, if you have equal chances to of winning and loosing, over the long term you will be earning money. But my experience shows, that 1 to 3 risk reward ratio is not enough, you need at least 1 to 5+ to be profitable by the end of the year, but this depends on the trading style.

Does fundamental research provides you with the plan for a trade? Clearly no. More work is required. So hedging strategy becomes a trading strategy. (and for the people that are aware of this... SCREW HEDGE ACCOUNTING!)

Everyone knows that trend is your friend until it ends. So the question is how you define a trend. I personally like to identify trends visually with the help of moving averages. Despite the latter are a lagging indicators, they serve as good support and resistance levels. Let's have a look at the world through moving averages:



Technically I am not buying this market until at least half of it goes green (price goes above moving averages). Before that I will ignore call on fundamentals getting better.. Trending and not necessarily fundamentally strong/weak markets are the ones we make money in. more tech analysis to follow soon.

2010 05 18 - Going technical

Preparing all the technical charts for this blog appears to be a little bit more difficult then I thought. But here we go...

I discussed previously relationship between dollar and other asset classes. once dollar goes up then everything falls. And the following bothers me a lot... I think we're at the inflection point. Below is the monthly chart of dollar index (trade weighted basket):



I don’t have much historical data, but on two occasions when index broke 200 month moving average it resulted in significant dollar rallies. Rally of 2008 is insignificant to rallies that started in April 1981 and January 1997 and lasted for several years. In the past strong dollar meant higher equity markets. But relationship reversed in the end of 2002 and beginning of 2003.

Put everything aside 200 month average is a good long term support / resistance for dollar index. If we break it upwards, there is a chance we might enter multi year dollar bull market. I am not sure what are the consequences for commodities and equities. Any opinions?

There is more technical analysis to come this week.

Blogger Sentiment

Previously I said I liked the idea to measure news sentiment on CNBC. Unfortunately there is already a similar tool, so this idea will not get my name. Anyway, check Blogger Sentiment poll.

end of the week note

Nobody is perfect and has to have a vacation from time to time, so please accept my apologies for silence.

Would anyone buy commodities in this environment? I agree that people forget bad news very fast. But memories do remain hidden somewhere in our brain. And for me it is a 'Déjà Vu'... I never try to look too far back and the only thing I know that extensive dollar rallies had never been good, it is a litmus paper of fear in the market.

And I don't think I will ever be able to understand it. I will leave it to smarter people to understand and explain (did anyone try to count the number of explanations of what is happening right now?). One part of me says 'hey, looks like growth in the world is sustainable', the other one, the one that is sometimes called subconsciousness part of the mind tells me to back off from making bullish calls on the world. And I also have a feeling that it is not only sovereign problems to blame for recent sell off.

Banks keep on calling and suggesting that it is a good opportunity to hedge. Well, may be... But what are the risks of going long now? Some time ago I read Michael Covel's book about Turtles. Anyone can be a trader and make money if you have systematic approach to trading and positive expectations for your success. You do not even have to understand what is going on, just follow the trend. I think this should be applicable to hedging strategies as well. And I do not have positive expectations for going long commodities. I say 'do not piss against the wind' (this is a literate translation of Russian proverb), you will not make money betting against the trend.

And looks like trends are about to change. Let's have a look at it over the weekend. So next time expect some heavy charting slang and lots of numbers... have a good weekend.

2010 May 10 - Note for today

Markets continued to be jittery throughout Friday trading despite some reassurance on recovery in job market in North America. However all things changed on Monday as Europe has created first ever TARP for countries amounting to 600b Euro. This morning I am getting all sorts of emails as banks try to forecast next market move. And the most striking thing is that views on commodities are different to FX. Come on! When will people realise that commodities are no more different from equities and FX? If you say that Euro is going to 1.20 in three month this not a buying opportunity for commodities! Start talking to each other, people! Have a look at the following intra day correlation matrix:




Only Nymex gas stands out from the crowd as it is probably the only market in this matrix that trades according to its own fundamentals. Everything else is trading in tandem.

Time will tell if I was right.

Off the topic idea:

Has anyone tried to build a market indicator using bullish/bearish news ratio published on CNBC website? I did not try to calculate it, but looks like bullish sentiment peaked probably a week before market collapsed. I think quantifying this can be an interesting topic for a research paper? if nobody thought about it before, I want to have it named after my name. In fact I liked this idea so much that I think I would suggest this to them. let's see if they get back to me.

have a good day

2010 May 07 - Note for today

Have electronic trading just saved us?

For those who do not know what happened yesterday, check any financial or general news website.

I mentioned already that since Tuesday this week it was fear that was driving the market. In normal conditions it would take weeks to hit that many stop loss orders and margin calls. Now many people that were invested suddenly aren't any more. So it is time to reassess your views and decide which way to invest your money.

But the story goes on, which country will investors choose to test its credibility? Mr Trichet did not say anything meaningful yesterday about EU crisis. I actually think it is a computer that writes speeches for him.

Looks like markets will take a breather for today and focus on NFP instead.

Trading note for today

Everything is going just wrong... all asset classes that a week ago were the best performers are the worst ones today. Feels like this is the end of the world.

But, there is a way out of this, a temporary solution though. I do not believe things will get better in Greece, Portugal and Spain. I actually think that France, UK and US will have troubles servicing its debts as well. Higher taxes, no economic growth will bring deflation and nobody will be able to hide from it. But my opinions never mattered for the markets.

Over the short term I am willing to give Mr. Trichet a chance to talk us out of this. I even consider the possibility ECB will cut interest rates. Why not? This is the last ace we have in the sleeve to temporary support the economy and hopefully it will buy us some time for this recovery to be sustainable. Most of the currencies and commodities are overstretched so there are some nice entry points with tight stop losses out there. I like buying commodity currencies and oil as technical picture there is not so bad as it is for base metals. Have a good trading day!