Innovate or Die – Futures Trading 101 for 2017

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If you haven’t seen the 2011 movie, “MoneyBall” and you hold yourself out as a futures trader – a trader of any kind or if you’re just trying to figure out how to get unstuck, stop reading this post, click on the above MoneyBall link and watch the 2 minute trailer, then come back to me….

Ok, today, not tomorrow but later on today, rent this movie from your preferred source. Netflix, YouTube, iTunes, Amazon Prime. Watch it, then in a week, watch it again. The lesson of this story can be life changing. The story revolves around Oakland A’s general manager, Billy Beane and how he was forced to figure out how to survive as the big money in Major League Baseball began to accelerate in the early 2000’s and further crush the smaller market teams. His solution: “Innovate or Die”. He innovated.

My friend Danny Riley of MrTopStep has basically been saying the same thing for the last 5 years. Danny has been preaching, “Things are different now and it ain’t going back”. Personally, I’ve been trading electronic futures and futures options for 22 years. I have zero floor trading experience. Danny has been trading for 32 years (longer?). He has a lot of floor trading experience but has now shifted MrTopStep and his personal trading to off-floor. Danny Riley is innovating.

I met Danny when he invited me to visit the trading floor of the CBOT few months after the “flash crash” of May 6, 2010. Things were already changing. No one could quite tell where it was all going but the changes were in full swing and the heretofore invisible writing on the wall was beginning to slowly reveal itself. It was now the beginning of the end for the way it had been. The HFT’s, the algorithm-trading programs of the big banks, funds and behemoth institutions had now swarmed us. They were definitely in full control. There were not enough actual traders left to keep them honest. It was only a matter of time before they ran the show completely. It was truly time to innovate or die. Many (most) died.

From 2005 to 2013 I traded my own account and accounts of up to 15 other clients. At my peak I managed about $12.5M. I was making really good money. So were my clients. Don’t get me wrong, you don’t win every day or every month. Losses are part of trading. Can’t stomach losses, pressure and some genuine gut churn, this game’s not for you. Client fires you because of a losing month, he was just looking for an excuse to get out. There are always setbacks but hey, regroup and move forward. If they can’t kill you, they can’t beat you. Right? Well…as it turned out, at least for me anyway, 2013 was a tipping point. The damage was done. The trading philosophy I’d spent the past 10 years perfecting, adjusting and perfecting some more, ceased to function in what seemed like literally from one day to the next. The great 20th century novelist, F. Scott Fitzgerald was once asked how he went broke, he said without hesitation, “Slowly at first, then suddenly…” I now understood his statement. I didn’t quite go broke – but I was absolutely broken.

By mid-2014, I was so beaten up, I took six months off from trading. If you’re interested in reading about it, I wrote a blog post that’s a bit tongue-in-check but it’s absolute perspective on what I’d been through. Click here > “My Crystal Ball Is On The Fritz”

Fast forward to 2017. Things change. I’ve learned to innovate because I almost died. In fact part of me did die a little bit. I now trade my own significantly smaller account and trade accounts for 5 clients. I am now managing $3.5M. Profits are much smaller percentages. I’m making less money. A lot less. My clients too are making less money. What happened to my other clients you ask? They wilted. Got scared. Panicked. But mostly they got used to making great money and thought it would never end. What could go wrong? They were making 3% or 4% or 5% a month, sometimes even more. 40%, 50% or even 60% in year when you let it pile up in your account for 12 full months. Losses were rare, profits relatively predictable. My biggest client at the time – a guy with $5M in his account actually said to me when things started getting rocky, “I want you to limit my profits to $200,000 a month.” Whaaaa……? “What did he just say?” I ask myself. This guy was not only taking profits for granted, he just assumed a 4% month was some kind of a scaled down given? WTF…? I no longer trade his account.

This had become an addicting scenario. When you stop the heroin drip, the withdrawals start immediately. I mean literally as well as figuratively. When the world changed (most of the time you can’t see change when you’re in it. There has to be enough time elapse so you can look back and see it) and you get hit with a stinging loss or even a couple of those in a row, trading results get volatile, returns start dropping into the mere mortal category of scattered losses and nominal profits of .5% or 1.5% a month, you find out which clients are good clients. Welcome to the new trading world. At least I was able to innovate.

Opportunities to trade are still plentiful. If the market is open, you can trade. Don’t. It used to be there were good trading opportunities almost everyday. Those days are over. GOOD trading opportunities are few and farther between. All you want to do now is look for a good opportunity, otherwise trade VERY small or don’t trade at all. How do you know a good trading opportunity? Great question. Here’s my answer: “You’ll know it when you see it”. Better to lose an opportunity than to lose your money. Danny Riley said he’s gonna be trading “one lots” to begin 2017. He’s smart. How do I know he’s smart? Because he’s still alive to trade. He’s learned to innovate. So too must we all.

My best trade of 2016 was “The Trump Trade”. Let me explain. I was not trading big, I was trading a small, low risk position. In the few days prior to November 8th, the market was rising and pricing in a Hillary Clinton victory. The S&P was trading around the 2150 mark. The media was pushing the agenda they wanted. The elites wanted Hillary and they were by God going to get her! The polls (which the media basically controlled) said she’d not only win – but win big. The media and T.V. pundits were all saying “We know what’s best for you and Donald Trump cannot win.” Never mind the energy, the enthusiasm, the 10’s of thousands of people who attended his rallies (I was one of those who attended a Trump rally, it was truly a great experience!). Everyone ignored Donald Trump – at their peril – from the very beginning.

In spite of all the media push and BS, I honestly believed Donald Trump would win. So as any good futures trader will tell you, “if your so sure, put your money where your mouth is”. So I did. A few days prior to election eve, I bought November end-of-the-month 2050 puts for 9.25 points. They were 100 points out of the money. As the election results began to pour in and a Donald Trump victory was beginning to unfold, the S&P futures went from a precipitous drop, to limit down. A full 5%, 105 point collapse. My puts were now in the money. As soon as the market began to tick back up, I sold the 2050 puts for 40 points before Trump’s acceptance speech ended and used half my profits to buy 2175 calls for 7.00 points. By the regular close on November 9th, I sold my 2175 calls for 15 points. It was my best month of the year. I finished November with a 4% profit!

Here’s the lesson: If this had happened 5 or 6 years earlier, this trade would have been a 12% or 15% winner because I’d have been trading bigger. The dollar value of the profit would have been 3 or 4 times greater. Those days are over. My trade was small across all of my managed accounts. My risk was defined, the cost of my option premium x’s the number of options contracts. Since it was an option purchase, there was zero additional margin requirement. The market moved my way very rapidly in both directions. I did not get greedy. I took significant profits quickly in the middle of the night, not during conventional trading hours.

This is just an example what how you have to trade in today’s world. You or me or the next guy or Danny Riley will never get it right every time. But it’s a safe bet if you trade less, trade smaller and try to trade smarter, you will in fact work your way into a few good trades. The calendar on 2016 ended for me with average of +17.43% in profits for the accounts I manage. A far cry from what I used to accomplish. But I’ll gladly take it. I’m still in the arena. I innovated. Now go watch MoneyBall and figure out how you can innovate.

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