Lessons from the Pros


Poor Performance Years and the Impact on Futures Traders

Welcome to 2016 and let’s hope the Futures markets finally decide to offer more opportunities for us swing traders.  During the year I was talking to some of my trading buddies and kept hearing the same thing, “What a rough year this has been.”  The ones who only day traded seemed to have a respectable year, but the ones who held overnight positions were not pleased with 2015.

I was updating my trading plan over the Holidays as I do each year and I noticed something I did last year that was unusual.  I actually made 3 other modifications during the year which is very unusual for me.  I’ve had the same trading style for many years and do my best to follow it just as it is written.  During 2015 I was making changes to my plan to accommodate the current market environment.

Free Trading WorkshopLooking back I wondered if I did the right thing or should I have just kept trading with my original plan?

As I reviewed the past year I did my usual Futures markets returns analysis for the year and found a rather interesting view of the Futures markets.

Out of 59 Futures markets only 10 of them had a positive return.   The 2 that had double digit returns were Cocoa 13% and Canola 12% while the rest were mediocre single digit returns.

Out of 59 Futures markets 30 had large double digit losses.  29 of those had losses greater than 10%.  And 17 of them were greater than 20% losses.  The worst performers as you might guess came in the energy sector.  Brent Crude was down -44%, Heating Oil down -42% and WTI Crude Oil down -38%.

The rest of the 59 were virtually unchanged for the year.

At the same time I found an article from a CNBC interview titled “2015 was the hardest year to make money in 78 years.”  The interview was conducted with Societe Generale and their comments just about summed up the year.

“According to data from Societe Generale, the best-performing asset class of 2015 has been stocks, whose meager 2 percent total return (that is, including dividends) still surpasses those of long-term bonds, short-term Treasury bills and commodities. These minimal gains make 2015 the worst year for finding returns since 1937, when the cash-like 3-month Treasury bill beat out other major asset classes with a return of 0.3 percent.”

The interview went on to say lack luster returns is why money managers have done so badly in 2015.  Hedge Funds were hard hit with the average return being down about 4% for 2015 according the Hedge Fund Research.

“It’s been an absolute meat grinder of a year,” McDonald said. “Hall-of-fame legends, [Warren] Buffett, David Einhorn, Carlos Slim, those are my favorite investors of all time and they all had bad years.”

According to other reports Warren Buffett is seeing his worst year since 2008 down 11% year to date.  Bill Ackman of Pershing Square Capital advised his investors that 2015 may be the Fund’s worst year since it was founded in 2004.

Most managers agree that even in bad years from the past there was at least one other asset class that offered substantial yields.

An interesting point from the interview was “2008 was a terrible year in the stock market, but bonds were up 22 percent. But this year, not one major asset class had a good year, and that’s what’s made it so difficult across the board.”

With T-Bills returning a meager 0.11% and the CRB Commodity Index falling more than 23% it was a tough year overall for parking money and expecting a decent return.

After performing my annual year review I still had that nagging question in my head.

Looking back I wondered if I did the right thing or should I have just kept trading with my original plan?

At this point I referred back to my trade sheets I keep for my trades.  For each trade I make I fill out a trade setup and execution sheet, much like a trade journal.  The most important part of that sheet to me is the question at the end of the worksheet “Why did I take this trade?”

If I took the trade out of my plans rules I must document that.  Or if any other emotional event caused me to break my management of the trade then I must document that as well.

This allows me to see if I had been following my rules or was there a change in the way my rules are working in the current market environment.  Interestingly enough I found I had been following my rules the majority of the time (only human, so I can’t expect to be perfect).

With this information I feel I did the right thing adjusting my rules to follow current market conditions.  If I had broken my rules more than I followed them then obviously I know the problem was with me and not my rules.

For many of our Futures markets this is back to back negative year to date returns.  Many of the Commodities are at or near production cost and this could cause a price rally if we get any domestic or export demand.

Don Dawson

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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