So I can not for the life of me figure out why 90+% of the trading population is fixated on “up” or “down.” Trading does not have to be about only one dimension. Making “up” or “down” calls is something you can train your pet chicken to do in your spare time. Considering how many active fund managers can’t beat their index, you could probably get a chicken to perform okay. Even the new “Bond King” Jeffrey Gundlach says, “in the financial markets, 80% of the time it’s a coin flip. But the other 20% of the time you have very high confidence and it’s not a coin flip.” This is coming from a guy who allegedly is great at making market calls. There are others who would say nearly 100% of the time it’s a coin flip (for example, Burton Malkiel, the author of A Random Walk Down Wall Street). One of my former managers used to say 55-60% is a really good success rate for directional trading. This basically corroborates what Gundlach was saying. I would have to agree. Is a bunch of 55-45 flips really what you want to base your career on? If you do one such trade a week for 50 weeks, there’s a 28% chance you’ll be down for the year. That’s not going to cut it at most firms… or even in your household.
One of the reasons I like trading STIR futures is that not only can you trade “up” and “down,” you can also trade across time (“left” and “right”). In Eurodollar futures, you have quarterly contracts you can trade every year, for over 5 years (and up to as much as 10 years). You can reasonably trade 28 contracts deep. This additional dimension also allows you to trade many different types of slope and curvature structures on different parts of the yield curve. With Eurodollars, there is also an even deeper options market that let’s you trade all strikes on the first 20 contracts. That adds a third dimension to the trade space. Just think about all the conditional structures you can trade! So when I want to say something about the path of interest rates, I can say something more than just “up” or “down.” The larger my canvas, the more freedom I have with which to express my views. Most importantly, you have a lot of opportunity to find value.