Trading Philosophy

Years ago, I had a conversation with a friend of mine who was working for one of the most successful CTAs in the business.  I told him about a trade I had made in coffee futures where I was long ahead of a major frost in Brazil.

The frost occurred over the weekend and coffee futures opened up about 30 cents on Monday morning.  That was worth over $10,000 per contract.

My buddy laughed as he told me they had gotten killed on that trade, because they were short heading into the weekend.  The fund manager he worked for employed a short term trading strategy, while I was utilizing the Turtle Trading System at the time, which is a trend following strategy.

The moral to this story is that there are numerous ways to make a profit in the futures markets.  And, no matter how good you are as a trader, you will have losing trades.

A few years after that coffee trade, I was working as an execution trader for Brandywine Asset Management (BAM).  BAM employed a systematic, multi-strategy approach to trading in the futures markets.

Some strategies involved trend following, some were fundamentally based and market specific.  The goal of BAM’s approach was to be uncorrelated both to the stock market and other CTAs.

Nowadays, the vast majority of CTAs employ a systematic approach to trading futures.  Because there is so much competition in these markets, many of these firms employ Phds in math, physics and other sciences in an effort to identify strategies that will give them an edge over the competition.

Ultimately, few of these CTAs generate consistent, market beating returns as some did in the 1980’s through the 1990’s.  As a result, many are content with simply providing returns that are uncorrelated to the stock market to please their institutional clients.

SCE Trading Philosophy

Because most CTAs do not employ discretion in their trading, due to the desires of their institutional clients, SCE believes that individual investors have an edge over these institutions.

That edge involves the use of discretion, only trading the best setups with your strategies, and trading with smaller position sizes.

Discretionary criteria actually played a significant role in the Turtle Trading System that was taught by Richard Dennis and William Eckhardt to their apprentices (the Turtles) in the early 1980’s.

Richard Dennis is featured in the book “Market Wizards” while William Eckhardt is featured in the book “The New Market Wizards.”  Both were written by Jack Schwager.

The criteria was used to rank potential trades to determine how aggressive a position may be built in a given market.

As a result, discretion plays an important role in the SCE Trading Philosophy.

SCE Trading Strategies

While the Turtle Trading System provides an excellent foundation of knowledge for understanding the futures markets, it requires a significant amount of capital to trade successfully over the long run.

As a result, it is generally not suitable for most individual investors who are interested in trading futures.

Over the last 25 years, I’ve conducted substantial research into trading futures in an effort to determine the best approach to trading futures for the indidvidual investor.

This research has lead to the development of a few core strategies that I believe help increase the potential for long term success.

These strategies are rooted in a mix of classical chart analysis and quantitative price patterns.  The strategies seek to capture moves that may last from one day to as many as several months.

Expectations

Given that relatively tight stop losses are employed with the trading opportunities identified by SCE, users of our analysis should expect that the majority of trades will result in small losses, scratches or small profits.  Occasionally, a windfall trade will present itself, and that is where the bulk of profits will occur.

Longer term profitability can arise from generating far more profits on winning trades than the losses that occur on losing trades.  The aim is to achieve a profit:/loss ratio of at least 3:1 or better.

Here are the key elements of the SCE Trading Philosophy…

  • Preservation of capital is the key to long term success
  • The markets will make it as difficult as possible to make money
  • Trending markets provide the best opportunities for profit
  • There is no one single strategy that works well all the time
  • Small traders/investors have the edge of selectivity over large speculators who primarily trade systematically
  • It is not necessary to capture every trend to be profitable in the long run
  • Take what the markets give you
  • Don’t try to grab every cent out of a trade… take the easy part and be happy
  • Keep it simple

To learn more about how to work with SCE, visit our Trading Services page.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts, commodity options or forex can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results. You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.

For a more complete discussion of the risks of trading futures, please visit the Risk Disclosure page.

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I will also provide you with documentation regarding the general approaches I use toward analyzing the futures markets.

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