What can go wrong & all at once

On the 8th of August 2018 this client was trading 3 programs with $55,750, $50,000 in principle, $5,750 in profits from previous trades.

Programs traded

1) Gold Collar
2) S&P Collar
3) Trading rate higher based on the Fed’s expectations for the rate they set.

All three programs went into drawdown’s at the same time making this the worst allocation I’ve traded for any new client in 2014.

Gold

The performance for his gold trades
What is posted on site ($11,002.07)
Versus his accounts actual loss in Gold ($10,975.72)
In his favor +$228.35

 ($10,975.72) was less than the previous worst case drawdown of ($12,276.00) and less than the represented risk of ($15,000), in unto itself  Gold would not be problematic, especially had either the S&P or the rates higher program picked up the damage. I wrote a report on why the losses in gold occurred and shared it with all clients trading the Gold Collar program.

The S&P Collar didn’t help out, it added insult to injury

August 2018 through October 2018

Reported loss on site was ($7,930.29)
His actual performance ($7,715.22)
In  his favor +$215.07

Reason for the discrepancy the client started on the 8th of August 2018 and missed the first losing trade of the month.

November 2018

Reported on site +$1,314.06
Client actual performance ($1,134.18)

Reason for the discrepancy, on the 24th of October the client revised his maintenance balance from 20,000 EUR up to $28,500 USD.

Friday the 16th of November 2018 his settlement balance was $29,321.84. Because his liquidation valuation was very close to his $28,500 maintenance balance he was automatically reduced to trading a maximum of 1 S&P contract and participating only in S&P trades with  $1,000 or less maximum risk.

Maximum risk on the trade taken ($830.17) this position was offset on Friday the 23rd of November net profit $795.00. He was also trading Gold and Rates higher program. Excluding rate trades if both Gold and the S&P hit maximum risk on the week of the 19th he would still be above his $28,500.00 liquidation value on Friday the 23rd, Both the S&P Collar and Gold Collar are in Recovery in December.

From Friday the 16th of November 2018 through Friday the 23rd of November 2018 the S&P dropped from 2,742.25 to 2.628.50 down 113.75 points, value of the move = $5,687.50

The S&P Collar program added positions all the way down,  of the $5,687.50 potential profit the S&P collar program caught $3,270.24. Because the client had moved his maintenance balance higher from 20,000 EUR to $28,500 USD and it was $29,321.84 Friday the 16th of November 2018 his S&P positions were limited to 1 contact. Of the $3,27024 potential move the client only captured $795.00, the difference ($2,475.24)

Chart

August 2018 through October 2018 S&P collar program drawdown

Reported loss on site was ($7,930.29)
His actual performance ($7,715.22)
In  his favor +$215.07

November 2018

Reported on site +$1,314.06
His actual performance ($1,134.18)
Against him ($2,475.24)

S&P Summary

Site versus his actual performance

Program performance on site = ($6,589.23)
His actual performance = ($8,849.40)

August 2018 discrepancy
On site
= ($1,394.93)
His actual loss ($1,217.84)
+177.09 in the client’s favor

November discrepancy
On site
+$1,341.06
His actual performance = ($1,134.18)
Difference = ($2,475.24)

S&P Performance Summary

Reported S&P Collar Performance = = ($6,589.23)
His actual performance = ($8,849.40)
August discrepancy explained ($215.07)
November discrepancy explained $2,475,24
Net difference = ($2,260.17)

During this period I wrote a report and posted linked here providing all clients trading the S&P Collar program of whay I believe losses occurred.

Although the market from the 8th of August through the 30th of November 2018 was ideal for a very short term trading programs it’s lethal for long term trading programs that have minimum trade duration of 1 week.

Chart

Assuming we had an intra-month, Intra-day, maximum drawdown of ($9,849.40 exceeding his drawdown of  ($8,849.40) by $1.000.00 the S&P Collar would still be below the previous worst case drawdown of ($12,457.00) and well below the represented risk of ($15,000). Again the S&P unto itself with a  ($6,589.23)  drawown would not have been problematic.

Adding further insult to Injury

Based on consistent statements made my both Fed chair Yellen and now Powell
from November 2015 though the 26th of September 2018, I represented to the client that trading rates higher according to the Fed had a high probability of showing gains. I consistently did traded rates higher anticipating the Federal Reserve would eventually correct about the rate they set. For confirmation see the Fed’s website.

The client started trading the rates higher on the 8th of August 2018, when rate hike expectation were trading at 0.4200%, position value $10,500.

From the 8th of August 2018 until the Fed meeting 26th of September we were able to show him a small net profit of $1,250.00 on offset positions, open trad equity was negative, out of a potential gross profit of of $2,875.00.

From the Fed meeting press conference on the 26th of September 2018
Full Fed post meeting press conferences the 26th pf September 2018 (57:51)

At this press conference Fed Chair Powell told us

“The US Economy is strong”
“Growth is running at a healthy clip”
“Unemployment is low”
“The number of people working is rising steadily”
“Wages are up ”
“Inflation is low and stable”
“Rates are normalizing”
“All of these are very good signs”

Fed chair Powell also stated the Fed expects they will raise rates from 2.15% on 26th of September to 3.40% by December 2020. For confirmation see the Fed’s website. This statement was consistent with every Fed meeting press conference held since November 2015 without exception.

Chart August through November 2018

After Powell’s glowing report on the 26th of September 2018 on the the US economy and it’s future, rate hike expectations went up from 0.5050% position value = $12,625.00 to 0.6450% position value = $16,125.00  the 5th of October 2018.

There still was a large aberration between where 15+ trillion in the face value of open positions was pricing rate increases at 0.6450% and the Fed’s anticipated rate increase of 1.25%  by December 2020. I continued to trade the client’s rates higher account aggressively, anticipating that the people that run the World’s largest Central Bank had a clue about the rate they set.

I also believed that the move already underway would continue and downward pressure would be temporary and the market would eventually price in Fed expectations of 1.25%, position value $31,205.00.

It didn’t work out that way, rate hike expectations went down hard from 0.6450% position vale = $16,125.00. on the 5th of October 2018 to 0.2300% by the 28th of November 2018 position value $5,750.00, for a loss per position of ($10,375.00). The client from the 26th of September 2018 though the 28th had a net loss of ($10,905.00).

Chart

During this sell off I did my best to adjust his positions not only to minimize the damage but to capture any recovery to recoup the loss and be profitable. Trade frequency was high clearing and exchange fees we’re running in excess of 3 times their monthly average.

Total loss in rates (9,655.00)

In this scenario this client experienced nearly the worst possible scenario in all three sectors he was trading at the same time on every front.

Simultaneous net losses occurred from 8th of August 2018 through the 30 of November 2018, generating a drawdown of $29,450.12 out of a represented risk of $40,000.

Gold ($10,945.72)
S&P (-$8,849.40)
Rates Higher (-$9,655.00)
Lossed From high (-$29,450.12)
Start balance $50,000.00
Marjket Gains $55,750.00
Ending balance $26,299.88
Net loss from high (-$29,450.12)
Loss on principle -$23,700.12

Although situations like this are very rate should you decide this or any speculative program be emotionally and financially to deal comfortable with a scenario like this.

Conclusions

During volatile markets regardless of how successful your programs have been lighten up and live, just as profit cycles can get larger so do drawdowns.

Don’t fall in love the economic fundamentals, always trade with the trend, long or short. Learn from my mistake with my program trading rates only higher.

Although this strategy worked very well from 2015 to mid 2018  and appeared to still be a valid based on the continued guidance by the Fed telling us they will hike the current 2.15% rate to 3.40% by December 2020. Believing the Fed had a clue about the rate they set was one of the top blunders of the past decade.

Know your risk tolerance level then cut it in half to eliminate stress, if your risk tolerance is $100,000 USD use $50,000, once the account is up $150,000 then increase overall risk to $100,000, it’s a lot easier to add positions when profitable than reduce when you’re in a large drawdown.

If you have any questions send a message or contact me

Regards,
Peter Knight Advisor

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