TopGunNote 

I only happened upon your Journal today as I was skimming across the numerous "End of Year" entries that so many here on nexusfi.com are posting this week. To start I have to say the thoroughness of your introspective review of your End of Year results was impressive. Having said that I have a couple of questions regarding your approach. (You don't have to answer, I'm just curious.)

Actually it wasn't an end of year review per-se; just a major revelation which has happened to occur near end of year. I also wonder if it wasn't coincidence because market sentiment is often bullish going into the holidays (hence, low vix and low volatility = aka few trading opportunities in risk off assets).

TopGunNote 

1.) What made you choose the 5-Yr Note to trade? (I've always found it difficult to trade something that by it's nature trades in relatively narrow, low dollar-value, ranges.)

I did a survey of different "small tick size" instruments mid year. This was before the micro eminis, dow, etc. came out. Here's a screenshot:



The problem with almost all of these instruments is that they suffered from liquidity issues.

Here's the full spreadsheet which has a bunch of stuff re: AMP margins, etc.
https://docs.google.com/spreadsheets/d/1zp0AFUFJ0pQ8M2Yg7ICexfoHVTRGHUAEwLl3tY3cMmM/edit?usp=sharing

The underlying assumption was: find volatility of each of these markets that would fit into a small account size. The options were pretty narrow.

But yeah - I agree with your point; hard to trade these narrow range instruments directionally. Which I suppose is another way to say that you need volatility in the market to trade directionally (and the shorter your time frame, the more volatility you need).

TopGunNote 

2.) What made you move away from trading Options? (I think you mentioned early on in your journal that you were profitable then.)

I was taking huge risks. Basically I was selling credit spreads on SPY (and sometimes SPX). But just because they were spreads doesn't mean they didn' t have the same problems as naked options; in fact, I think I was actually taking more risk, because even though the downside was technically capped, I would lose roughly half my account if a really major sell off happened (where with naked options I'd just be down as if I had 2x leverage).

So I think a strategy like this might work, but you'd need to position size accordingly (aka not one big trade resting on SPX not falling 5% next week / next month). If I did this by spreading out my risk on several non-correlated assets this *might* work. (This is how optionalpha trades, AFAIK).

But the real revelation occurred when I realized I hadn't really beaten the market. If I had just bought SPY at the start of the year and sold at the end of the year I would have done better, with presumably less risk (because SPY won't, most likely drop by 50-100%).

TopGunNote 

3.) Did you ever consider trading Options that augment the holdings in your longer term portfolio and only using Futures to offset some of the risk in that portfolio? (I only mention this because it was a grain farmer in Manitoba that first introduced me to Futures. He used them to limit his exposure to the inevitable fluctuations in the market price of the grain he had sitting in the silos on his farm.)

.

Yeah, this is a good point. I think this is how big banks / big players actually use these derivative instruments - as a way to hedge out risk, not as a way to speculate. Of course, I'm just speculating here And that's a good point that I should start thinking of using futures in the future to hedge risk vs. necessarily going to the options market (which is my natural gut instinct).

TopGunNote 

Lastly, if you haven't yet had an opportunity to read any of the trading related ideas posted over in the journal titled " Tao te Trade: way of the WLD" by @wldman. I would suggest you take a good long read through his journal before you decide to "throw in the towel" on your Futures account.

Thanks for the reference! Will definitely check it out.

But one thing I've been thinking about is: who cares about the instrument? I.e., why not be "product indifferent"? Who cares if you are trading SPX options or SPY or /ES? They all move the same way, the question is why trade that instrument, then what is the best way to express that trade (if you think vol is going to die down, maybe selling options work best). Maybe you expect some upside but want to hedge your downside (ok, buy SPY and buy spy puts or sell micro eminis, etc).

I guess what I'm getting to is not so much that I'm abandoning futures, per se as I am short term directional trading in the bond market with futures. If I'm abandoning anything, it's:

* short term trading daily (as in trying to every day during 8AM-12PM pacific)
* abandoning directional, non hedged, outright futures because they are highly leveraged and I don't want to put huge amounts of my net worth in something that highly leveraged
* trying to trade off order flow or thinking it gives me an edge. This includes Jigsaw tools. This is not to say they aren't good tools (I actually think they are excellent) but I don't think it's giving me an edge (at least not a profitable one). Peter Davis has always made the distinction between "cake" and "icing" and has described order flow as Icing. I agree with that so am going to focus on making the cake for now (maybe icing will come later?).

Basically, if I pursue directional trading, I'll probably do so with instruments that aren't highly leveraged; this will probably be TLT or SPY or something similar; the micro e-minis might also be an option. To trade these leveraged instruments I'd need much more in the account (I think probably a minimum of 25k. consider: 1% of 25k = $250. that's a 5 point stop on /ES).

TopGunNote 

Good luck, enjoy the holidays and I hope you have an amazing 2020.

Thanks! You too!

Everyone is great on here (on nexusfi.com) and I've gotten so much good feedback + info from others so want to thank everyone for responding.

smtlaissezfaire 

The problem with almost all of these instruments is that they suffered from liquidity issues. The underlying assumption was: find volatility of each of these markets that would fit into a small account size. The options were pretty narrow. But yeah - I agree with your point; hard to trade these narrow range instruments.

I doubt there were liquidity issues with the 5 Year Note based on the volume it trades, but I agree that it would be a difficult contract to make money trading in.

If you consider my prior post where I mentioned that grain farmer's reasoning for using Futures, and then ask yourself, "What would I use the 5 Year Note to accomplish?"

If your answer is that you hold a fair amount of medium term Corporate or Sovereign bonds in your portfolio and you have concerns with what might happen with the portion that reflects the middle of the Yield curve,
then you should be using the 5 Year Notes to protect your investment against adverse moves.

If your answer is, you want to trade Treasuries but the price per tick is why you chose the 5-Year Note, then you need to reassess your decision.
As a product to trade for a speculator / day trader, it's more likely to result in "Death by 1,000 cuts".

I'm not going to tell you to trade something else, but if you like the way Treasuries "move" have you ever considered trading the 30-Year Bond?

I put together two screenshots here for you to consider.
(Note the decrease in Daily Volume traded around Thanksgiving and Christmas.)

Best of luck on your journey.

TopGunNote 

I doubt there were liquidity issues with the 5 Year Note based on the volume it trades, but I agree that it would be a difficult contract to make money trading in.

Agreed. I meant the other micro contracts (especially the forex pairs - I believe the micro grains - micro wheat, corn, etc.) had liquidity issues. the 5 year and even MGC seemed to have reasonable liquidity.

TopGunNote 

If you consider my prior post where I mentioned that grain farmer's reasoning for using Futures, and then ask yourself, "What would I use the 5 Year Note to accomplish?" If your answer is that you hold a fair amount of medium term Corporate or Sovereign bonds in your portfolio and you have concerns with what might happen with the portion that reflects the middle of the Yield curve, then you should be using the 5 Year Notes to protect your investment against adverse moves. If your answer is, you want to trade Treasuries but the price per tick is why you chose the 5-Year Note, then you need to reassess your decision. As a product to trade for a speculator / day trader, it's more likely to result in "Death by 1,000 cuts".

Right. Which is to say it's not volatile enough to day trade; rather it's used as a hedging mechanism. Agreed!

TopGunNote 

I'm not going to tell you to trade something else, but if you like the way Treasuries "move" have you ever considered trading the 30-Year Bond?

Yes - actually I started trading out scalping UB for one tick when I had a slightly larger account (5k). I knew this was still a pretty pathetic account size but I think I get your point. You essentially get more leverage out on the extreme end of the curve. Also better tick to commission ratio.

But on account size, if you consider a 31.25 tick size and want a 4 tick stop:

$31.25 x 4 = $125 loss per trade

(Is 3-4 ticks a normal loss on ZB or UB?)

assume on a bad day you get 3 losing trades a day: $375

Now if you really want the odds in your favor, you really need to start with: 100 x 375 = $37500 (assuming max 1% risk per day).

So as I see it, that's the basic math with at least being well capitalized and giving yourself a semi-decent shot (after knowing you can make money) if you want to trade the 30 year.

But I take your point - maybe a better instrument that a) is further out on the yield curve to obtain more volatility and b) has better tick to commission ratios.

Instead of starting with a larger account, I'd love to be able to start with a smaller account - $10k, for instance, and prove that I can make money before putting a lot more towards it (25-50k). At 25-50k it starts becoming money I really don't want to lose, and I know trading from a sacred place like that isn't a good idea (I've had P&L swings of $5k up and down in account and I don't sleep well, based on the small account size!).

Maybe there's a better instrument that can mirror the bonds? Or is my math re: account size off?

TopGunNote 

I put together two screenshots here for you to consider. (Note the decrease in Daily Volume traded around Thanksgiving and Christmas.) Best of luck on your journey.

Hmm, so maybe the lack of volatility was a bit temporary.

But also - that seems to be a swing chart. How many of those moves started + finished in the afternoons?

smtlaissezfaire 

But also - that seems to be a swing chart. How many of those moves started + finished in the afternoons?

The screenshot wasn't meant to be an all inclusive assessment,
I was merely trying to highlight that during similar periods in time over the last few months,
the move in the ZB was roughly five times greater than the move in the ZF (looking at a dollar value basis)

My point being "If you're looking to take a bite "out of the middle" wouldn't you rather take it from a larger slice of pie?"

As for your comments about risk vs account size, I really can't comment.
That's a personal thing that everyone needs to assess on their own.

I admit, when I first started trading Futures, I blew up a $10,000 account twice before I started to slowly turn things around.

After it happened the second time, I opted to trade a 1 lot on a $2,500 account reasoning that I would not be homeless if that account got shut down by my broker.
(It helped me sleep better keeping the other $7,500 in my pocket.) This was around the time of the MF Global collapse.
It also helped me learn to be patient and to wait for exactly my setup before entering a trade.
You don't have very many ways to manage your trade when you're using a 1 lot.
But it can help you learn to be very selective about your entries.

When I blew up those first two accounts, I lost to the ES and I promised myself I would never trade it again.
When they introduced the Micro's earlier this year I decided to take another look at the "Micro"ES using a 5 lot. (which as you know, is the equivalent of 1/2 of an E-mini contract on a Dollar Value basis.)

So far, there are days when I think I've matured as a trader.
And then there are days when I still feel like Shultz from Hogan's Heroes - "I know nothing, I see nothing......"
But no matter the day's outcome, I rise the next day ready to come back here and try all over again.

I turned 63 in September and have enjoyed my journey here with the people at futures.io and with others who have shared their good days and bad days with me along the way.

My wish for you this Christmas is that you too can find your way.

Good luck.
JB

Thanks for the feedback all.

I decided to make another post / a new journal for the new trading style that I'm exploring -

Trading Journal: Path to Consistent Profitability + Trading Career - Pt 2 Trade Review - Jan 5, 2020 I figured that Id start a new journal as 1) its the start of a new year and 2) Im drastically shifting focus. Heres my old journal: Or in a google doc: And here is this one, in a google doc: To recap …