Anatomy of a Trend Following Trade- the Short Exit

We’ve spent a fair amount of time covering a fictional Crude trade in order to better illustrate how a typical trend following trade operates. We covered the long side entry in March when the Middle East and Japan threw the markets for a loop, and updated when the trade got stopped out in May. We then took a look at the entry of a short Crude trade back in August, and gave the subject even further coverage in last week’s newsletter by highlighting what the journey of the trade is like.

Now, with Crude having rallied 23% higher from its October 4th lows – our fictitious trade has unfortunately seen its end, with the most recent push above $90 pushing prices above the 80 day moving average of prices (most trend following models use a similar approach risking a move back to the 50 to 200 day moving average).

Disclaimer: Past performance is not necessarily indicative of future results.

The end result? While at one point making over $10,000 on the trade when prices were down around $75/barrel, this trade ended up losing about -$5,000 (depending on whether you got out at the close of the day which pierced the moving average or the open of the following day).

As we’ve said before, this is exactly the kind of trade which drives investors- in managed futures in general, and trend following strategies in particular – crazy. Seeing an open trade profit of $10k turn into a loss of -$5k is not easy, and it takes a certain type of individual to understand that, while unfortunate, the loss of -$5k is manageable, especially when considering it would be on an account of $200k to $1 million.  And that the nature of markets is such that you must live through several such losses (the two Crude trades we’ve profiled thus far have both been losers) before seeing the outlier trades which trend followers hang their hats on.

We’ll keep an eye out for the next Crude trend following trade to highlight just how all this works once again, and maybe one of these days find a winner.










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DISCLAIMER

Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.

The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex, and is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts. Opinions expressed are that of the author.

*The mention of specific asset class performance (i.e. +3.2%, -4.6%) is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.), and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship and self reporting biases, and instant history.

The mention of general asset class performance (i.e. managed futures did well, stocks were down, bonds were up) is based on Attain’s direct experience in those asset classes, estimates of performance of dozens of CTAs followed by Attain, and averaging of various indices designed to track said asset classes.

It should be noted that past market performance is not indicative of future market movement.No market data or other information is warranted by Attain Capital Management as to completeness or accuracy, express or implied, and is subject to change without notice.

Managed Futures Disclaimer:

Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.