Frequency and Drawdowns

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A well-meaning Sloper from India wrote to me this morning, suggesting that I simply accept the fact that Goldman Sachs has unlimited access to free money from the government and will simply keep bidding this market higher. Thus, I should focus most of my trading on longs with occasional shorts here and there as a hedge.

I recognize this email was well-intended, but I must trade with integrity. If I wind up losing money, and I am faced with a client who wants to know why, I could envision a couple of possible answers:

1. "I was basing my trading on a historical analog which had been working well for nearly two years, but the analog ceased to work, and I was wrongly positioned."


2. "Goldman has a lot of money, and they cheat, so I decided to just buy stocks with the hope the market would just keep going Goldman's way."

Reason (2) might actually be a more profitable trading strategy, but I could never utter it in the face of a trading loss, because it would mean I was basing my trades on whimsical innuendo as opposed to a method I respect.

My core problem with this market, as I've mentioned, is frequency. I'm a swing trader. Dealing with a market that does a 180 degree turn every few dozen trading hours is maddening. Because being up 5%, down 5%, up 5%, down 5%, up 5%, down 5% is taxing to a man's soul.

In a market with any kind of trend, I'd instead be up 15%, down 5%, up 15%, down 5%, and so forth, which I can happily handle.

Since I've only said it three hundred times, I'll say it again: my postulate is that the market will reach around 925-930 within the next couple of months, and I want to be positioned for that. I am basing my positions on individually-selected securities that, on their own, seem like good short setups.

I have tempered with positions with three longs – DBA, FXE, and – – much smaller – – CPX (which is a position I suggested a few days ago and has been performing well).

I will say this, however… least an actively managed portfolio – even a bearish one – has held up OK in the chaos of the past ten months better than a straight-up bearish position. For instance, let's say you decided the market was generally going to be in trouble, so you bought TWM, which is the ultra-short ETF based on the Russell 2000. You'd be down about 30% at this point, even though the Russell has barely budged. So even though I've been running in place for ten months, at least I'm not facing that kind of uphill battle.

I did go through all my charts again, which I used to do every one or two weeks, but now I am doing nightly (and there are a thousand charts, so it's a lot of work). I did smoke out 20 positions which I put in my Bullish camp, but half of them are nothing more than Badly Beaten So Maybe They'll Bounce Back, which isn't my favorite reason to buy a stock. The other half – – if that – – are honest-to-goodness good-looking bullish patterns, which I'll probably share some of later this weekend.

The bottom line for me is that I'lm going to continue to base my trading on the 925 target until the evidence points me elsewhere. And, should that target be met, I plan to cover all my shorts and trade almost exclusively on the long side for many months to come.