This entry was posted on Sunday, April 15th, 2007 at 7:57 pm and is filed under Trades. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
In my post a month ago, I chronicled how I had received a second entry in my ETF trend following system for USO. Now that the position has had some time to develop, I wanted to post a followup. Here is the daily chart showing my initial entry, my second entry, the max positive excursion and max adverse excursion:
As you can see, after the second entry, USO continued down for a few more days and at one point, the first position was ~5% negative and the 2nd was almost 4% negative. Then the Iranian’s captured the British sailors causing a quick rally in oil. At it’s peak, the two positions were up 9.3% and 8.3% respectively. USO has since pulled back and the positions currently sit at +4% and +3%. The system has not triggered an exit yet, so I’ll be holding until it does and will be sure to make a post when I do exit so we can evaluate how successful the trade was.
What is important about this is not the actual numbers, but becoming familiar with exactly how a system trades to allow you to execute it properly. In the past 30 days, these positions have had an almost 15% swing from low to high, which is to be expected for a commodity as volatile as oil. It’s also important to remember that the average winner in this system is 14% while the average loser is 4%. These are the numbers that should drive your position sizing. Look through all the trades the system generated. What was the worst loser? Take that value and double it. Now multiply that loss by the percent of your portfolio you plan to allocate to each trade to determine how much the individual trade impacted your overall portfolio. Is that a number your comfortable with? If not, reduce position size until you are comfortable. I use a relatively small position size (~2% of my portfolio) on each entry. In the case of USO that has the max of 2 entries, I have a 4% exposure. If USO were to gap down 25%, I’d be looking at a 1% loss of my portfolio overall (4 * .25), which is a number I can live with.
- John
April 15th, 2007 at 8:20 pm
I’d be a bit leary about holding on to USO for any length of time.
http://www.forbes.com/options/feeds/options/2007/04/10/options17045.html
Have you considered buying Oil futures direct? or are the contract sizes too large? I have no idea.
April 15th, 2007 at 10:13 pm
Brig I will speak for John on this. It’s entirely mechanical. “Leary” means nothing in mechanical models. It
is trend following script for Wealth-lab that has tested very well on indexes. As with any trend follower , the percentage winners are low and winners are much larger than losers.
It’s the same as my swing trading script - everyone wants to short when I am going long. Yet year after year that trading system has had phenomenal performance.
April 16th, 2007 at 9:57 am
BriG,
Thanks for the link, I’ve read a couple similar articles on USO versus price of oil before. If you notice, the article actually says that the reason for the disconnect between USO and the “price of oil” is because of rolling the futures. If I was purchasing the futures directly, I’d have the exact same issue, having to roll from one contract to the next which would have a higher price. For example, right now the May contract is 63.425, the June contract is 66.075 and the July contract is 67.525. So these issues exists whether you trade the ETF or the futures directly. Hope this explanation helps.