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Turning Down The Portfolio Heat

dollar.index

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There have been a lot of parabolas lately. And if you’ve added to them early on, chances are you’re watching your portfolio rise dramatically. The US Dollar index has been making new lows, and many others such as Sugar, Cotton, and Soybeans have been making multi-year highs.

The risk here is that you become hypnotized by the gigantic unrealized gains you’ve attained in your portfolio: they have come with seemingly great ease. Parabolas cannot continue to grow indefinitely. Over my career, I have seen markets reverse course with no warning.

cotton

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If you’re fully loaded and haven’t taken some profits by now, you might consider putting stops in for each of your positions. By that I mean offset each position 100%. If you have 1 or 30 gold contracts, put your stop in for the full position. When the reversal hits, it will be bloody.

I’ve been there and it’s very frustrating. Since I don’t like that feeling, now I puke out the entire portfolio at the same time. This is a discretionary trade for me, but you can program your model to measure the daily drawdown and base your offsetting trades on that if you want. You can always get back in.

sugar

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If the news is especially shocking, you’ll likely see all the trends reverse on the same day. That gives rise to my recommendation to purge your entire portfolio. In doing so, you’ll keep more of the profits. Otherwise, you’ll be sitting there feeling like an idiot because just days ago your account was significantly higher, and your overall RoR was higher too. Not anymore…

gold

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I don’t believe that parabolas mean “bubbles,” per se. I think what you see in many of the charts here are “panicked buyers” as much as anything else and traders responding to very tight supply.

soybeans

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When one of your stops gets hit, you can offset the other positions at market prices even if those stops have not gotten hit yet. Don’t get stuck daydreaming about how great you are. You need to keep those gains. Especially near the end of a month or quarter like we are now.

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  • Michael, looking through the patterns here I could see a couple of small gaps, say in soyabeans, but not a rash of them. Does this mean that there is a possibility of a further acceleration in price action beyond the current phase – something that looks more like the classic blow off?

    Simon Kerr, London

  • Anonymous

    Easy to say now that it’s happened, but what I was getting at was I
    thought that you’d see some violent counter-trend price action. We saw
    that in the grains this week and in cotton. I don’t think that means
    that the trends have reversed.

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