Postmortem on a Losing Trade

This post is about process. It is a little longer winded than other VCM posts.

Trade Idea

Re-read what I wrote about gold in the VCM Valentine’s Day Review. The actionable idea was to press a potential break of the short term uptrend below $1,224.50/oz on February 15th at the trends inflection point. Key factors:

1) Long term down trend active for another ~$100/oz

2) Hard inflection point at $1,224.50/oz

3) Vulnerable downside February 15th

4) Tricky to manage risk around inflection points

Say my writing had been more open ended “use $1,224.50/oz as an inflection point on gold February 15th, long above, short below. The short term trend is up, the long term trend is down but price is currently $100/oz below the long term inflection point.”

Then I could circle back and say “VCM outlined the short term trend inflection point correctly, gold held and there is still a long way to long term resistance.”

That’s not now it works if you take outright directional positions in actively traded futures contracts. VCM prides itself on being transparent and explicit. That’s a double edged sword. VCM partners executed short positions on the downside break below $1,224.50/oz and suffered their worst losses of 2017.

What did we learn?

Traders get educated in real time with real PNL. It doesn’t pay to dwell on the past. That said, before we move on it’s imperative we understand the factors that worked for us and against us in the prior trade. Note — in this post I am deconstructing a single trade, in reality you want to do this with a larger sample size.

What stands out about the gold trade? First, the short term trend (up) and the long term trend (down) were not in alignment. Next, the execution point bet with the long term trend at the exact point the short term trend had to defend to remain active. Also, did we really know the dollar value at risk per contract at the time of execution?

Question number one. Are the short term and long term trends pointing in the same direction? If the answer is yes to that then traders want to execute at short term inflection points in the direction of the long term trend. That is the core of what we do at VCM. We are trend followers. What if the answer is no? Then traders have to respect the short term trend in the face of the bigger picture.

That’s exactly what VCM failed to do in this gold short. As one of the strongest markets of 2017, the short term trend in gold is clearly up. Picking a downside inflection point where that trend is vulnerable is hoping that the long term trend is strong enough to turn the short term momentum. The only time this is an acceptable option is when the short term and long term inflection points are in the same place. Put another way, if you’re ~$100/oz below the maximum you think gold can trade and still be in a down trend then you shouldn’t be counting on failure.

If you can’t help yourself and want to bet against a short term trend with a long term trend don’t do it at the short term trends inflection point. In this gold example a better counter-trend execution would have been against a prior high or prior high close. As dumb as it sounds — if you’re making a directional trade in one direction, price shouldn’t really go in the other direction. Highs, lows, or closes against your position are telling you you might be wrong.

That circles back to the dollar value you have at risk per contract per trade. Risk is higher going counter trend at inflection.

Moving on…

Hope you enjoyed the re-cap of a bad idea. We do this so we don’t repeat our mistakes. We’ll be back soon with a general market update.

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