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Lessons Learned from 37 Years of Futures Trading
March 28, 2011
Managed Futures have come a long way in the past 37 years, and so has Barbara Mueller, who will be retiring at the end of March after nearly four decades dealing with futures trading. Barbara has been working in the industry since 1973, and has been an invaluable asset to Attain Capital since 2006.
In honor of her retirement, we're taking a break from our traditional analysis this week to pay tribute to Ms. Mueller. It has been an honor to work with someone as knowledgeable, talented and motivated as Barbara, and here she provides us with her (often comical) insight from 37 years of experience in the world of futures trading.
Moving Forward, Looking Back
When Attain asked me to come up with a list of the best things I’ve learned after more than 3 ½ decades in the futures industry, it was pretty daunting. After all, 37+ years ago, we were in the stone age of trading. We did have the wheel (and telephones), but there were no personal computers, no fax machines, no stock index futures, no US options on futures, no 24 hour markets, and gold was trading at $135 an ounce. There were no Treasury bond futures or other financial instrument futures. The CFTC and NFA (the futures regulatory agencies) did not exist yet. We were governed by the CEA -the Commodity Exchange Authority. And the list goes on.
Typical commissions were $75 to $100 round turn. Account forms were only 1 page! Some of the prices were still written on blackboards at the Chicago Board of Trade and you could inspect physical grain there as well. The whole managed futures industry was an still an embryo, with Richard Dennis not teaching his Turtles until 1983 and Paul Tudor Jones still a clerk on the trading floor. S&P futures, the most popular trading system vehicle in the world, wasn’t launched until 1982 (the minis didn’t start trading until 1997!) Options on commodities in the United States weren’t authorized until 1984 and System Writer, the precursor to Trade Station, wasn’t launched until 1989.
As one of the first women brokers in the futures industry, it’s been quite a journey-and an accidental one at that. I was just waiting for a teaching job to open up in the Chicago Public School System and my Dad suggested I go to work for one of his friends at the Chicago Board of Trade in the interim. Thirty seven years later, I guess I can no longer call this an “interim” job!
In the beginning…
My first real “brokerage” job in the industry was with Conti Commodities-a division of Continental Grain. Fortunately, that eventually led me to the world of system trading and managed futures. I was a nice Jewish girl from the Chicago North Shore suburbs, and trying to make a living calling farmers to tell them how to market their crops was laughable! I didn’t know the first thing about agriculture, and besides, most of America was not used to doing business with women. Being a 23 year old “girl” and cold calling men at night was a huge challenge (their wives were not thrilled, to say the least). I used to pretend I was the long distance operator just to try to get to talk to their husbands. In fact, I patterned my voice after the character, Ernestine, performed by Lily Tomlin on Saturday Night Live in 1976 (see here).
That same year I discovered technical trading. It allowed me to bypass all those USDA supply and demand stats, not to mention all the regional weather reports. Charting at that time had to be done by hand from prices in the commodity section of the Wall Street Journal. However, even charting trend lines, point and figures, Fibonacci numbers, Elliot Wave, etc. seemed to be lacking the precise trade discipline I sought.
I read a book in the late 70’s by Charles Lindsay called The Trident System. I was hooked. I programmed it into my calculator and off I went. As I started craving more sophisticated systems, I attended dozens of system seminars presented by Larry Williams, Wells Wilder, etc. for $3000 a piece-(that was a lot of money back then) In fact, an early client of mine who used to also attend, started the Club 3000 network to review all these systems and report on their claims. (This was 3 years before Futures Truth first published.)
My career has taken me from a being cold calling saleswoman at Rosenthal Collins back in the London Options’ days, to the hay day of Conti Commodity; from the junk bond, Michael Milken, days at Drexel Burnham Lambert, to Bear Stearns, where I incurred my most embarrassing moment ever. In between were stints at Blunt Ellis and Lowe, Stotler, Index Futures Group, MF Global, LFG, and Refco. Of all those clearing firms, only MF Global is still around. I’ve outlasted everyone it seems!
If you read the embarrassing moment story above, you realize that was not the end of my professional career.
In 1999, I started my own trading firm, Growth Financial, a firm totally committed to Managed Futures. In 2006, we merged with Attain, and I quickly knew they were the ones to carry the torch: A firm that was, and continues to be, a leader in new, cutting edge technologies. A firm based on knowledge of the markets, integrity and honesty. We had a lot of offers from other firms, but Attain was the only choice as far as we were concerned. At Attain, the client has always come first. That’s why I’m keeping my accounts with them and like most of you, will be a client.
So after taking this long, incredible journey, what have I learned and what can I pass on to you? The number one thing that struck me as I was going through all the boxes I have been schlepping around for all these years and re-reading articles and newsletters I wrote is this: No matter how much has changed in the world: technology, the global nature of the markets, the economy, etc. ; the economic principles I’ve espoused and preached for all these years, still retain their importance today. All the tenets I adopted so long ago are still the ones that hold true for successful investing in today’s global economy. It is what we at Attain still preach to clients. Some of these are actual excerpts from articles and newsletters I wrote in the early 90’s!
Without further ado, 20 things I’ve learned after 37 years in the futures business:
#1: DISCIPLINE, DISCIPLINE, DISCIPLINE. It was my first rule then and it’s my first rule now. Whether you are an investor, a broker or a CTA, emotional decision making is often a trader’s worst enemy. Automated trading systems and many CTAs rigidly follow proprietary trading systems which remove this emotional element from trading. And, frankly, most individual investors don’t have the ability to be that disciplined.
#2: Your largest drawdown is always in the future. (This is the only part of trading that is guaranteed!)
#3: The markets can remain irrational far longer than you can remain solvent! (I had this printed above my desk for years!) That’s why you need #1!
#4: Manage risk successfully and the rest will take care of itself.
#5: When trading managed programs, allow for double the historical drawdown both emotionally and financially. Have an exit strategy in place before you start trading, as once you are in a trade or program, you are no longer objective and you are managing your thought process emotionally.
#6: Consider booking the profits on one program before the trading level is increased and use them to fund a different program. This can help build a diversified portfolio with the house’s money, so to speak, which may help smooth your equity curve.
#7A: Don’t double up on your investment at new equity highs. A normal drawdown at 2 times speed will likely exceed the profits you just made.
#7B: Do consider adding new programs and systems during a drawdown. This is hard to do since confidence levels are always highest at the equity peak and lowest at the equity valley.
#8: Don’t trade FOREX unless you are a bank! This will probably get me in hot water with all the Forex system developers out there. But really folks, I have never spoken with a single investor who has made money with FOREX in real time (despite what all those ads say).
#9: Don’t cherry pick trades. When you are following a system, take all the trades, not just the ones you agree with. After all, if you were such a trading genius, you wouldn’t need a system to begin with. This is the best reason I know for managed futures!
#10: Don’t fall prey to Great Trade/Month/Year Syndrome - This is what I call the condition which seems to occur after a nice run for an investment causes someone to believe they are a financial genius – inevitably leading to poorer investment decisions.
#11: Don’t bargain with God as your primary method of risk management. It rarely works-unless you are one of the chosen few (none of whom I personally know). I learned this lesson the hard way in the late 70’s when I was trapped for 10 consecutive trading days in a limit move and all the praying in the world couldn’t get me out.
#12: Choose the right broker. As technology exploded, so did the sophistication and popularity of systems and managed futures. The sheer number of systems, CTA’s, and futures based hedge funds offered today seems infinite. You need an expert pilot to navigate these waters. Clearly, I think Attain is the best possible choice.
#13: Develop strong relationships with your clients. Otherwise, you are only as good as your last trade. A personal aside: many years ago I had a client who had never made money with me- mostly because he cherry picked only certain trades from a system (see #9). He called to tell me he was leaving for another broker and I wished him luck and told him if things didn’t work out-he could always come back. About 2 years and many brokers later, he called to say he wanted to reopen his account. I was astounded and asked why-his answer was that he’d tried a number of other brokers and had not made money with them either. He said that if he was going to lose, he wanted to do it with someone he trusted and felt cared about him. So men-listen up-let your warm and fuzzy flag fly!
#14: When the “you know what” hits the fan-don’t hide! Communicate with your clients and reassure them you are minding the store and understand their discomfort. It’s what you would want if the shoe was on the other foot, and what you owe to them in the relationship.
#15: Put your money where your mouth is. Share your own personal investment decisions. If the recommendation isn’t good enough for you-why should it be good enough for your clients? And system developers, if you don’t have the confidence to trade your own system-why should I?
#16: Be honest about what you know and don’t know, then offer to find out the answer if you don’t. Don’t try to B.S. or finesse the answer-you’ll look and sound like a fool and destroy any trust you’ve built.
#17: Don’t choose your broker solely by the lowest commission rate. Remember, in life, you typically get what you pay for!
#18: Check what commission rate you will be charged INCLUDING ALL FEES.
#19: Don’t ever pay up front for a trading system (excluding newsletters subscriptions and software).
#20: Allow enough for slippage and commissions when analyzing a track record. Most vendors and brokers deduct little or nothing and this will drastically alter a system’s performance. Mostly, this applies to systems, as registered CTAs are required by law to show net results. Attain Capital is one of the few firms who show net system results. http://www.attaincapital.com/alternative-investment-performance/trading-systems/recommended-systems/page1
In the land of should, the above rules are easy and no doubt seem obvious and simplistic. However, even after all these years in the business, maintaining discipline is sometimes a challenge. After all, I’m an emotional creature like everyone else, and like you, I detest losing money. There is nothing we hate more than getting out at the bottom; and it is that fear that keeps us at the party too long. Thankfully, Attain will be watching my back!
As to what’s next, I don’t know, but I’m definitely looking forward to the adventure! So, as I sail off into retirement, I’d like to thank Attain Capital for allowing me to finish out my career on a high note. Sometimes it was a struggle. When I first joined them, they wanted a paperless office and had to literally pry my rolodex out of my hands (they had never seen one before). I came late to advanced technology and the learning curve wasn’t always smooth. Thanks, Attain for putting up with me, (most of the time). J
I’d especially like to thank all of my clients. It’s been an honor and a privilege to work with you. To all the clients who followed me over the years from firm to firm, you and your families have become close friends, and it is those relationships that kept me focused when the going got tough.
My warmest regards,
SENIOR VP, CLIENT PORTFOLIO MANAGEMENT | ATTAIN CAPITAL MANAGEMENT, LLC
PS. If you’d like to contact me, please let the folks at Attain know and they will pass along the message and your contact info. Or you can find me on Facebook or LinkedIn.
IMPORTANT RISK DISCLOSURE
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Volatility was still in play in most market sectors during the past week, with optimistic domestic market headlines pushing the crisis in Japan and military escalation in Libya out of the lime light. Both dire situations settled a bit last week, as electricity restoration at the ailing nuclear plant in Japan allowed cooling operations to be started, and the U.N. mandated No-Fly zone in Libya turned the tide on pro-government forces, ultimately easing market and risk anxiety.
Economic headlines in the U.S. aided in marketplace optimism as a round of reports featuring a bump up in Q4 GDP circulated, while discussions from several Fed officials regarding no extension of QE2 helped price appreciation. Reports elsewhere were basically in line with expectations, although European debt issues started to appear as Portugal grappled with the consequences of rejected austerity proposals. Market activity as a whole ended in the mostly higher category. NASDAQ futures were up 4.30%, aided from an upbeat outlook from the Tech sector, while Russell 2000 futures were up 3.61%, Dow futures up 3.14%, Mid-Cap 400 futures up 2.98% and S&P 500 futures up 2.81%.
Trade in energy futures saw growth as a result of continued instability in Libya and positive indicators for domestic economic growth. Natural Gas was up 5.63%, followed by Crude Oil- up 3.49%, RBOBO Gasoline- up 3.22% and Heating Oil- up 1.01%. Metals also caught the bid from better economic news in the U.S. Silver was up 5.68%, hitting a new 30+ year high. Palladium was up 2.63%, while Copper was up 1.84%, Platinum up 1.29%, and Gold up 0.71%.
Food and Grains finished mixed, although there were a few sharp rallies in some areas as participants tried to factor in the changes to the supply/demand scenarios for Asia along in combination with harvesting delays in South America. Livestock, with Live Cattle up 5.49% and Lean Hogs up 4.18%, saw the largest appreciation, followed by Cocoa- up 3.68%, Cotton- up 2.70%, Wheat- up 1.41%, Corn- up 0.88%, and Sugar- up 0.54%. Under performers were Coffee, at -2.39%, OJ, at -0.61%, and Soybeans, at -0.31%.
Better prospects for the U.S. economy, worries about the sovereign debt situation in Europe and the repatriation of the Yen losing steam sent risk players to the sidelines. The U.S. Dollar Index, up 0.67%, benefitted from the headlines as the balance of the complex ended lower, with the Swiss Franc at -1.93%, British Pound at -1.23% Euro at -0.61% and Japanese Yen at -0.54%.
With only four days of trading left in March, shorter-term multi-market programs are on the verge of their best performing month since July of last year. Programs like Quantum Leap (+9.49% in March) and GT Capital (+6.40% this month) have benefited from the surge in global macro volatility, and are hoping that the improved trading conditions stick around for awhile. Other short-term programs in the black this month include Futures Truth SAM 101 at +5.95%, Bouchard Capital at +3.10%, Dominion Sapphire at +1.70%, and DMH at +0.33%.
Of course, the surge in volatility has not been good for everyone, notably long-term multi-market traders. Futures Truth MS4 at +1.14% and Clarke Capital Global Magnum at +0.10% are the only two longer-term programs in the black for the month. Programs in the red include Clark Global Basic at -0.26%, Auctos at -1.07%, Dighton Capital at -1.30%, Integrated Global Concentrated at -1.60%, 2100 Xenon 2X at -2.72%, Covenant Aggressive at -3.00%, Robinson-Langley at -4.45%, James River Capital Navigator at -4.90%, APA Strategic Diversification at -5.60%, Hoffman Asset at -5.60%, Clarke Worldwide at -10.80%, and APA Modified at -11.80%. Short-term programs in the red include Mesirow Low Volatility at -0.30%, Mesirow Absolute Return at -0.70%, and Accela Global Short Term at -7.10%.
Short-term stock index programs have not enjoyed the same amount of success as their global macro counterparts. Programs down for the month include the Paskewitz 3X Contrarian at -1.64%, Roe Capital Jefferson at -11.41%, and Roe Monticello at -15.14%.
Foreign currency traders are also mostly down for the month including P/E Investments- Standard at -3.60%.
Historically, option trading manager results have been hinged on rising and falling volatility trends across the markets they track. As always, there is an exception to every rule, and this month is proving to be that exception. Despite rising volatility across the board, we are seeing a staggering mix across the option managers we’re tracking. The top performer has been White River Group who is ahead 4.10%, followed by Crescent Bay BVP at +3.89%, Clarity Capital at +2.40%, HB Capital at +1.89%, ACE SIPC at +1.67%, Crescent Bay PSI at +1.21%, Cervino Diversified 2x at +0.30% and Cervino Diversified 1x at +0.06%.
On the losing side of the equation are a host of the diversified option traders who have been forced to battle with a wide range of market volatilities. The current estimates are as follows: FCI CPP at -0.21%, FCI OSS at -2.10%, ACE DCP at -3.38%, and Liberty Funds Group at -9.41%.
Specialty market manager results have been mixed across strategy type and within concentrated market segments. In the agriculture markets, NDX Shadrach is ahead 2.88% and NDX Abednego is ahead 0.79%, while Ocrant, Global AG and Rosetta are all down 1.73%, 3.40% and 4.03%, respectively. Spread trader Emil Van Essen is ahead 1.67%. Gold specialist Cervino Gold is ahead 1.55% while AFB Forty Eighter is down 0.36%. Fixed Income specialist 2100 Xenon has had a volatile month; after pushing ahead approximately 1.5% early in the month they are now down approximately 0.59%.
Day trading systems bounced back nicely last week, while swing systems continued to struggle with minimal gains over the previous week’s disastrous performance. The majority of the day trading systems that were profitable last week got long early in the day on Monday and held on through the slow crawl upwards exiting at the end of the day. On the swing side, many systems were caught short and hurt by some of the large overnight moves in the equity markets.
Waugh CTO ERL had by far the best week among the swing trading systems. Waugh CTO ERL, which trades the mini Russell 2000 futures contracts, earned a profit of $2,430.00. Waugh CTO ERL benefited greatly from the large overnight moves that were occurring in the equity markets. For example, on March 18th Waugh CTO got long at 1:30 pm. The following Monday, the market opened 10 points higher from where it closed on Friday, putting Waugh CTO in an excellent position. Similar situations occurred all week long, and Waugh CTO positioned itself to benefit from all of them. Other positive results included Bounce EMD up $100.00, Bounce ERL up $110.00, MoneyBeans up $404.50, Bam 90 Single Contract ES up $657.50, Bam 90 M Squared ES up $1,290.00, and Bam 90 ES up $1,315.00.
The swing systems on the losing side this week were mainly short for the majority of the week. Strategic got short on Friday and was actually in a profitable position as the day came to a close, but the equity markets went up over the weekend and Strategic found itself in a losing position. It stayed short through Monday, only to get flat on Tuesday. For the week, Strategic ES lost $492.50 and Strategic SP lost $5,125.00. Other results included Jaws US 60 down $623.75, Moneymaker ES down $1,067.50, August TD EMD down $1,720.00, and AG Mechwarrior ES down $1,920.00.
Things were much prettier on the day trading side. Bounce ERL got long early on Monday and benefited from the slow shift upwards in the mini Russell 2000 market. BounceMOC ERL was up $650.00 for the week. Other positive results included Compass SP up $25.00, PSI! ERL up $356.06, and BounceMOC EMD up $470.00. The only system on the downside of things was Compass ES, and it was only down $5.00 for the week.
IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.
Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.
The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.
Please read carefully the CFTC required disclaimer regarding hypothetical results below.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.