Thursday, November 06, 2008

Position sizes

As I mentioned last month, I went live on my futures trading system. It has been an interesting experience so far, and it has thoroughly tested my rationality and decision making. From testing the system I figured I could start trading with 20-30k. So I started at the high range to be somewhat safe.

What I didn't count on was extreme market volatility. When you have average true ranges in the 40s and 50s in some commodities it is almost impossible to limit your risk to a sensible amount. With this volatility, I would have to have at least $1-2 million in equity to be able to take a single contract position in markets like corn, soybeans, silver, and sugar. I have forgone at least 8-10 trades due to this. Jason Russel, from Salida Capital, mentioned the same thing in his monthly performance report:
"October 2008 will be a month for the history books as unprecedented volatility stormed through each and every asset class. In response to the volatility, position sizes dropped dramatically to the point where they seemed insignificant. However, the daily portfolio volatility still remained high."

You can see the performance report here: http://michaelcovel.com/pdfs/jason-r.pdf

The good thing about volatility is that it is possible to make outstanding returns. Last month was the highest returning month in the system's history. I am expecting significant drawdowns in the next couple months as I think that there's a good possibility that price inflation will start to creep back into the picture. Don't forget Bretton Woods II and the ouster of the dollar as the world's reserve currency. Scary stuff.

Here are the results thus far. Like I mentioned, I'm expecting a drawdown any time in the next couple weeks to a month as some of the positions I have are either very extended or just lack any real direction.



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