Forecasting the Turn

This wont be a lengthy, in depth piece about the predictive power of charts. In fact, if you ever cared to watch my GtLH segments on BTFDtv you'd know that I can't read a chart to save my life. Now that doesn't stop me from drawing lines everywhere and then shading in the funky areas to make some great geometric designs... However, not a single piece has sold on my Etsy Shop and I've not made one trade off of the colored works. It's probably best that I hang up that skill for one that will be profitable. Rather, this a a flow piece...

Here's just a glimpse of what I see:
There's been a spread buyer in the June / July 1 month calendar spread {ZQMN15} in the Fed Funds for the last 9 weeks. Initially, they began purchasing 1000 at a price of 4.5. After that, they bought roughly 3500 at 4 before moving it all to the 3.5 line and bidding for another 6000. In total, I suspect the buyer is long about 7500-8000 spreads. Roughly the entire open interest in July...

If I was to speculate on the buyer, I'd say it smells of a European player. His playbook always included buying blocks of spreads. The price was attractive too. Even at the top level of 4.5 the buyer was still buying < 29% chance of a rate move. That payout is almost 4:1 and could potentially be more if Yellen comes out with a shock and awe FOMC statement. The spread is currently 4.5 / 5, better bid.

I think its telling where the buying is taking place. For a long time, we've heard that 2015 will be the year we finally fix the ZIRP problem. If that's true and the buyer is right, the mid June 2015 meeting could finally be the tipping point. For the sake of P&L, buying 100 MN15 spreads at 5 and catching a 25 basis point hike, nets you a profit of $45,000. Double that number if Yellen goes 50 bps. Of course, I wont stay in the spread long enough to capture all of that move, but she still seems hell bent on telegraphing the playbook, so maybe she'll tip her hand 6 months early...who knows? I'm long, lezzgo.

Finally, one interesting trade from Friday 3/14. As the trading day was coming to a close all of the Fed Funds were drifting aimlessly higher but the spreads weren't moving. Normally when the outrights trade higher the spreads sell off a bit. Then a buyer stepped in and bought about 1500-2000 spreads on the hard offers. All were executed simultaneously, all mid year 2015 spreads, and none of them were working orders that moved up... they were all new. Now, I realize that volatility was getting bid across the curve and that there was a war premium being built in for the weekend... BUT no trader in their right mind would lift non moving, hard offered spreads as a hedge to a weekend bet on war. Again... just something to keep your eye on.

~LH

Have You Learned From This?

I think that's the fundamental question every trader should ask when their trade is done. 

"Have I learned a lesson from this trade and will I be better equipped on the next round?"

The reality of trading is that you should be taking something away every day. On the most basic and fundamental level, this should be income. If you're not making money, there's really no reason to keep trading. The stress is far too intense and the toll extracted is too great to do this for zero or negative dollars. Ever professional trader I know understands that losers provide great teaching opportunities, but only the mature veterans understand that winners actually create the lessons we should crave for. 

As a parent there is an easy correlation. My kids are phenomenal but occasionally they need a bit of correction. If I only taught them what not to do, that list would grow daily. For a 6 year old boy that just wants to be all boy, there are a bunch of moments where band-aids will be required if there isn't a behavioral change. If my paradigm for correction is always in the negative, he will most likely keep on with his trial and error methods, looking for the best possible outcome. However, given a bit of guidance on what he should do, one would imagine that he'd use that positive reinforced lesson to minimize negative results. His list of "To-Do's" will be kept tidy and succinct. While the actions outside of that list stay vastly umcategorized and ignored.

If I go back and scrape out all the winning factors of my successful trades the list is actually quite small. Occasionally there is something extraordinary, a factor that lands outside of three standard deviations, but the reality is most fall here.

• Genesis: Was this trade crafted from my soul? Did it come from a place of learned experience or is it just a fleeting thought that I overheard at the bar?
• Risk: Were all the pros and cons correctly annotated?
• Execution: When it was there did I pull the trigger? Not early, not late, but when it was there.
• Anticipation: Was I blind to the market or did I see the changes coming. The trade needs to be proactive, anticipating the market's next move.
• The Payout: When I felt the upside no longer justified the risk, did I pull the plug?

Looking at some of my biggest winners, its very easy to pick out a "Yes" on all of those questions. My biggest losers have a couple "Yeses" but a laundry list of bad decisions is often coupled with them. Its much easier to identify the right things I did versus listing the multitude of mistakes I made. Focus on the short list of positive attributes and simply be conscious of the lengthy list of horrible moves you're not doing. Like raising a kid, tell him how to do it right and maybe he'll follow the instructions and win the game too.

~LH