Notes From Underground: Trading Strategies For An Automated World

Yesterday, I sat down with the group TOPSTEP TRADER to discuss ways I prepare to trade. Topstep is a private group that educates/prepares potential traders for a profitable existence. As the fourth quarter has begun, I thought this video would be beneficial as a review for my readers. Reviewing rules and concepts are important, especially as I BELIEVE WE ARE HEADING INTO A PERIOD OF INCREASED VOLATILITY. A rise in market volatility can be a time of great profit but it comes with a major increase in risk. The complacency of the market because of the central banks continued intervention coupled with the risk selling of the risk-parity crowd. I say crowd because it is not just AQR and Bridgewater involved in risk parity but there are many volatility sellers piggy backing on the power of the largest market players. Remember, when George Soros/Druckenmiller broke the Bank of England in September 1992, it wasn’t just Soros but many of the banks servicing Soros were tailcoating the Quantum Fund. But when the elephants leave the drinking hole many denizens of the jungle get crushed (Niederhoffer).

Here’s little market moving news in the past week:
1. The September unemployment report was very difficult to read because of the dislocations caused by two major hurricanes. The headline payroll number was very weak at -33,000 but average hourly earnings were very strong at 0.5 %, initially sending BOND YIELDS HIGHER, THE DOLLAR HIGHER and precious metals lower. All of these moves reversed by the end of the day as White House Noise unnerved markets going into the weekend.
On Monday (Columbus Day in the U.S.), markets experienced very thin volume. It amazed me that the S&Ps were higher in the face of the growing dissension between Trump and Senator Corker. The White House is searching for a major victory with a TAX CUT package. Bob Corker will have to be a significant ally so I am astounded that the tweet machine would turn to such pejorative parlance for a keystone of any tax package. And yet the S&Ps closed higher Monday and Tuesday. In an Oct. 1 BLOG POST, I noted that the S&P/BOND ratio had closed on an all-time high, taking out the December 1999 high. In the following eight days this spread has seen the S&Ps gain another 2% against the BONDS, giving this relationship a high level of validity. A sign of potential weakness in the equity markets will be if the RATIO were to retrace and trade beneath the previous significant 1634.0 level. Check your charts to determine your reference points.
2. Europe quieted Tuesday as it appears that the Catalan independence leader Carles Puigdemont “… stepped back from making a formal declaration.” Wednesday should bring a rally in the peripheral European sovereign debt market versus the BUND, as well as some renewed strength in the Euro Stoxx 50 as it has been weighed down by concerns over Catalan’s impact on Spanish corporations. Ten percent of the Stoxx is large Spanish banks and other companies. In two weeks the ECB will announce its recalibration concerns, which will become the central issue for investors seeking European debt and equity instruments. Former German Finance Minister Wolfgang Schaeuble was busy on Monday throwing up speed bumps for French President Macron’s plans for expediting a unified financial system with a harmonized fiscal authority. The road to European financial harmonization is dependent on Merkel gaining control over her new governing coalition. There will be political recalibration as well as ECB QE recalibration. Patience is as always advised.

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11 Responses to “Notes From Underground: Trading Strategies For An Automated World”

  1. Michael Grieco Says:

    Mr. Harris: I read everything you write and greatly appreciate you trying to help your readers. If you have a moment, I’m trying to duplicate the S&P/Bond ratio and cannot find the symbols of the ratio that you use. $SPX/$USD2Y or 10Y, 20Y?
    Thank you!

    • Yra Says:

      Michael–I use the CQG continuous charts and my symbols are EPZ7/usaz7—-and using the monthly it goes way back.It is the sp /30 year but you can play with it and improve upon it–thanks

  2. Rob Syp Says:

    Another rosy picture painted of what to expect in bond markets…

    https://www.cnbc.com/2017/10/06/wealth-manager-warns-on-bond-markets-creating-the-biggest-financial-crisis-of-our-lifetime.html

  3. Algo Luvr Says:

    Yra,
    Thanks for posting the TST video and sharing your thoughts. Regarding increased volatility, the question will be whether anyone will be on bid when the “elephants” stampede? The potential risk would appear greater based on Brexit, election night and of course Flash Crash liquidity or lack thereof.

    • Yra Says:

      Algo—that is the key question will be who steps in as the short volatility trades unravel with the pain from the risk parity crowd all looking for an exit.

  4. Quentin Says:

    Yra, in the interview you mentioned taking small trades to test your ideas. Will you mind sharing how much of capital is at risk for these small trades?

    Anywhere between 5 to 10 basis points of your capital? Or slightly more?

    • Yra Says:

      Quentin—the level you cite is as high a risk I would ever take for just trying to test an idea in the market.My portfolio is not virtual reality but real cash—so 5 basis points would be it at tops.the levels of entry are of course the most critical

      • Quentin Says:

        Sir, if you don’t mind a few follow up questions:

        1) How about high conviction trades? 5 basis points too?

        2) On average, what’s the total percentage of your capital would you put at risk in markets? (i.e. at portfolio level)

        – How about in the scenario where you are killing it (where almost every position work in your favor)?

        – How about during times where you are going through a rough patch and reducing risk?

        3) On average, how many positions do you run in your portfolio? (including positions you have added per trading theme / idea)

      • Yra Says:

        Quentin–I do not have any hard and fast rules–when I am trading poorly I always reduce risk but I am more likely to adjust in reference to market conditions more then anything else—I try not to run too many positions as it becomes too confusing so I look to where my “edge” is the greatest which changes depending where the trade is based on time of duration of the move.High convictions trades with technical picture in sync with fundamentals receive a higher capital allocation

  5. Arthur Says:

    From a macro perspective, your thoughts on Catalonia’s independence?

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