Market Forecasts, Trade Selection & Great Reads (July 2, 2017)

Lots of good stuff this week. However, if you are pressed for time,  here is the bullet point breakdown. Simply click on what you want to read and go right there.

Good morning traders.

I wanted to share with you some information I compile on my own trades.

For years I have documented my trades and routinely looked at the performance many ways. My most recent version of my Trade Log calculates some pretty key metrics that I believe provide the insight needed to know if your trading is firing on all cylinders.

The screenshots below consist of various metrics that were calculated on the options trades in one of my trading accounts going back to January 2016. The vast majority of these trades were also highlighted in the Stock/Options Service.

Average risk per trade was around .50%. Bear in mind, I also took these same trades in my 401k and IRA accounts. So the total risk per trade was usually between 1-2% of my accounts when taken collectively.

But here is what I want to focus on: quality of the trades and where there is room for improvement.

  • Yes, the trades were profitable
  • This particular account brought in a gain of $4,209, or a 3.5% return ($120,130 starting balance)
  • The equity curve looks solid as does the draw-down and reward/risk ratio and winning/losing trade percentage.

So why would I even look at this data and see that there is room for improvement?

There are four key metrics that I track and you should too. They shed light on far more than simple P&L. In fact, some of these figures clearly suggest that there is room for improvement. Don’t let P&L alone lull you into complacency…

  • The Sharpe Ratio should be familiar to most traders. But if not, the Sharpe Ratio simply measures excess returns above a risk-free asset, say a 90-day T-Bill. The higher the sharpe Ratio the better the returns have been relative to the amount of risk taken to achieve those returns. A solid summary can be found here.
  • First, the Calmar Ratio is for a fixed time frame; mostly, 3 years. Calmar Ratio is based on actual drawdown, not volatility. Drawdown is a better measure of risk than volatility; drawdowns can be long and deep. Just measuring volatility doesn’t give a picture of the drawdown risk. The Calmar Ratio Calmar ratio of more than 5 is considered excellent, a ratio of 2 – 5 is very good and 1 – 2 is just good.
  • Profit Factor is simply defined as gross profits divided by gross losses. You can’t get more simple than that.  So, if your profit for the past year was $40,000 and your losses were $20,000, your Profit Factor would be 2. ($40k / $20k = 2). A Profit Factor above 2 is outstanding. Obviously, the larger the number is, the better. For example: a Profit Factor of 3 means your net gains were 3 times greater than your net losses, and anything above 3 is unheard of.
  • The Gain to Pain Ratio (GPR) expresses the returns in relation of the risk taken by the trader.  GPR is the primary performance metric used in Jack Schwager’s book “Hedge Fund Market Wizards”.  GPR represents the sum of all monthly returns divided by the absolute value of the sum of all monthly losses. A GPR value above 1.5 is considered to be excellent; a GPR value of 1 is considered to be good, and GPR value of less than 0 is considered to be bad. Most people use the Sharpe Ratio to measure risks.  The Sharpe Ratio expresses how much excess return you receive for the extra volatility that you endure for holding the riskier asset. I prefer using the GPR instead of Sharpe Ratio because in the Sharpe Ratio you get penalized for upside volatility. To me that does not make too much sense.

By focusing on these measurements I believe it gets you to start thinking more critically about the trades you place and how you manage them. By doing so, you will start to become a more discriminating and effective trader.

Trade Selection: Beyond Technical Analysis

Let’s face it, there is much noise out there in the trading space that it is difficult to know what is legit and what is complete BS. My take is that more of the stuff out there is complete BS. Secondly, most of the focus is on the really short-term time frames. While I do not necessarily have an issue with that (I started out that way too), that myopic focus detracts from one’s ability to really learn to think critically about the markets and make trades that have the potential for more robust returns.

Rather, blending in a healthy dose of fundamental and/or quantitative analysis in with your technicals is a really good idea.

The recent trades we have on here at Aspen Trading reflect that.

I was/am looking for higher oil prices and a lower USD (Dollar Index – DXC). Based on this, we are long USO (from $9.25) as well as being short USD/CAD (short from 1.3238 with revised stops at 1.3025). We are also long EUR/USD (in the ATSU Service) from 1.1182 with revised stops at 1.1385

Looking for higher oil prices did not seem like the right call given the steep downtrend recently. However, this is where using a multidimensional approach can pay-off nicely.

  • Technically, both oil (USO) and USD/CAD were on the verge of a reversal.
  • The Dollar Index (DXC), after breaking the key 99 level back in early May, is now in my opinion on a sustained downtrend. Using the rally over the last week or so to reload EUR/USD shorts was a no-brainer
  • Insightful quantitative data from the team at Nautilus Capital suggested a turn higher in oil was due. They were spot on.


Additionally, there are times when it pays to go against the grain. Many traders fall victim trying to fade every low and high. That is a pretty low probability approach and will quickly evaporate ones trading account and desire to be a trader.

However, strategically looking for solid reward/risk opportunities pays off. Sure, you typically do not get the immediate gratification of being right, but if you layer into your trades and have conviction, it can often play out nicely. Our longs in USO and short in USD/CAD took some time to kick in.

My friend, Raghee Horner looks at the market like this too – but of course with her own unique style. She looks ahead rather than just focusing on what is happening now or in the past. That can be uncomfortable for many. However, unless you stand for something, you will simply bob like a cork in the trading ocean.

Raghee was good enough to share some of her current insights on the market with Aspen clients. I think you will find her analysis insightful.

Raghee will be presenting at The Trader’s Round Table in October.

Must Reads, Listens and Watches

  • Volatility Means Opportunityère’s-deepak-gulati
  • I found the quote below simply hysterical.

NYSE President Tom Farley launched a verbal broadside at short sellers this morning, in testimony before at the House Financial Services Committee:

So, let me get this straight. Having a negative opinion on a stock that might be either overvalued or worse, an outright fraud (remember Enron?) or some degree of creative accounting is ‘icky’?

So Mr. Farley thinks it is perfectly fine for people and fund managers to bid up companies to ridiculous valuations and thus when the music stops, as it always does, have those some sheep get slaughtered on the way down?  What an idiotic thing to say.

Ask Dave

Let’s face it, it is so tempting to want to call a top in the S&P 500. Stocks are overvalued, the move higher is concentrated in a tiny handful of stocks, warped monetary policies are largely the driver of higher prices, not economic robustness. I could go on and on.

Sadly, these arguments, as well as technical arguments, fall VERY SHORT of offering any meaningful insight as to when this bloated market will crack lower.

One Aspen client asked about using Elliott Wave to project a market top….here is my answer…




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