Curve AdvisorKeymasterJune 24, 2015 at 5:53 pmPost count: 612
Lately I’ve had a few conversations with clients regarding hitting their P&L goals.
I want to start by telling you a story from back in the day. I may have mentioned this briefly in another thread. One of my former colleagues that I enjoyed sitting with traded the very short end of the curve. He was consistently profitable… but typically only made a few million dollars for the bank. Unfortunately, our manager fired him one year because he did not feel that he would ever generate the $10+ million target that all traders on the desk had. I believe the manager had a talk with him about taking more risk, but he didn’t do it – probably because he didn’t feel the “right” opportunity came up. In retrospect, the worst thing you can do is to get fired because you were given risk and did not use it.
No matter what situation you are in, whether you work for a bank, a hedge fund, or are an individual investor, you are going to have capital that you are given to work with. Think about how best to OPTIMIZE THAT CAPITAL USAGE. That is just as important as making money on your trades. No one cares if you have a 75+% hit rate on your trades, if you don’t do any size that matters. A 20% return using only 20% of your capital is only a 4% return on 100% of your capital. You just went from a reasonable 20% return -to a probably-unacceptable-in-almost-all-scenarios 4% return trading “risky” interest rate derivatives. Unless you work at a place where just having any positive return is considered “excellent,” think about ways you can optimize your capital usage, within the parameters of your company’s trading requirements.
[to be continued]
Curve AdvisorKeymasterDecember 29, 2015 at 8:24 pmPost count: 612
Now that we are about to start a new trading year, I thought I would offer some suggestions on how to plan for the new year. A lot of people go into the new year thinking, “gee, I hope I get some good home run trading opportunities this year.” That is akin to a major league hitter walking up to the plate and saying “gee, I hope the pitcher leaves a hanging curveball over the plate.” I’m not saying that couldn’t happen, or that it wouldn’t be awesome if it did. But is that really the best approach to planning out a year of your career?
I will admit that the majority of trading opportunities in a year are “unexpected.” That is, there is really no way to plan for it. You just never know what is going to happen – how the data will evolve, what current events bombshells there will be, what the positioning/liquidity landscape is going to be, etc. So there is always going to be a “reactionary” component to taking positions. However, this does not mean you can’t do a little planning, with respect to things you want to try and accomplish for the year. This exercise will also help you determine the proper sizing of trades, to hit your P&L targets, while allowing to to determine the impacts on your capital usage.
Curve AdvisorKeymasterDecember 31, 2015 at 4:47 pmPost count: 612
To continue with the baseball analogy, most “professional” hitters will do some form of planning/review prior to facing a pitcher. I suppose there is the rare “natural” hitter who can just wake up, walk to the batter’s box and still do well. But even this type of hitter could perform even better with a little planning. The assessment will look at a combination of (1) what your particular skill set is, and (2) what the tendencies the opponents had presented in the past.
So what do I mean when I say to “plan” for the new year? You should have some idea of where your P&L is going to come from. Let’s say your P&L target is 100 units (I used “100” because it translates well to percentages). How will you get there? What are the things you do that provide positive expected value vs the rest of the market? Remember, trading futures is a zero sum game. So unless you enjoy lighting money on fire, you need to be able to identify some areas where you think you may be able to pick up positive value. Once you identify those areas, how would you assign the relative importance and impact of those strategies, in the context of your overall goal? And once you assign the relative importance of those strategies, are you sizing the strategies correctly to reach those goals?
[I will expand on the above ideas in following posts]
Curve AdvisorKeymasterJanuary 6, 2016 at 4:14 amPost count: 612
The first place to start is to look back at the previous year. Below are some of the things you should ask yourself:
* How did you make your money? It may help to aggregate the data in a meaningful way, by summarizing your data by product (ED, ER, equities, etc) or type of trade (butterfly, spread, cross-product, cross-market, carry, etc) or method of trading (technicals, algos, etc).
* How might you have improved your results? Did you do enough size, scale in properly, stop out properly? What things would you like to improve upon next year?
* Do you expect the same categories to be meaningful contributors next year? Why or why not?
* What new areas do you expect could be positive contributors to you P&L next year? Your experiences in the past year may help you determine which areas you may want to explore next year. And one of my Trading Philosophies is to constantly develop new modules of profitability.
Use the above information to estimate where you think your P&L may come from next year.
Curve AdvisorKeymasterJanuary 8, 2016 at 6:42 pmPost count: 612
Once you identified your P&L categories, take a closer look at each area. Your estimates could have a wide degree of error. And you never know what sorts of new opportunities will present themselves during the year. But that does not have mean the exercise isn’t useful – even if you can get within 50% of your target, this sort of planning can be helpful. Overall, you would expect some categories to be higher than expected and others lower, so the ups and downs could net out.
* Think about what kind of sizing you think would be appropriate for the various strategies to realistically achieve your goal. I realize you have to make a lot of assumptions, but you should have a reasonable idea from past experience.
* Be conservative/realistic. There could easily be categories you lose money on as well. Ideally you would estimate accurately. But it’s probably best to plan low with high upside potential than plan high with high downside potential.
* Compare your sizing and its effect on your capital. The last thing you want is to get underway and then get the tap on the shoulder from compliance.
* Consider how comfortable you would feel having that sizing on. It may be that you feel most comfortable trading X lots, but your target requires you to trade 10X lots. Something has to give. Assuming it’s you (and not your target, use a visualization exercise (like golfers) to develop a comfort level.
IMPORTANT: You should always trade within your comfort level! The last thing you want is to have on too large a position that hampers your trading mindset. However, you need to be realistic about your goals if there is a discrepancy between your comfort level and your destination. This planning exercise attempts to do that, before you get to year-end.
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