There was some blog discussion yesterday on a recent 10-10 Trade that Joey Miller teaches in one of our advanced courses on cash flow trading that may have caused some confusion about the merits of the trade that I asked Joey to respond to.
Joey is the head of derivatives trading for the Rule One Capital hedge fund and has an astonishing track record for consecutive successful trades. In addition, he's an astute investor and I listen to what he says about lots of things including derivative trading. What he wrote below is about the trade in question and more and is well worth a read
From Joey Miller, Rule One Capital hedge fund derivatives CIO
The 10-10 trade we teach has done quite well. It has not had a loss for over a year including this recent trade. In fact, if you followed the rules, you've never had a losing year. Of course, I have to say that this fact, while compelling and confirming how profitable this trade can be, does not guarantee there will not be a losing trade or losing years in the future with the 10-10 system.
The 10-10 strategy can be backtested and I have taught every student to backtest the system before they ever trade it live. Every student should have gone back 10-20 years to see how the trade performs across all sorts of markets so there will be no surprises when the market makes a sudden move. If a student has not done their homework they have no business trading this system because without the background it is very easy to get caught up by ERI. If we strongly suggest something to our students its because we know you'll need it. What I have noticed is some students do not take our advice about backtesting. They only "forward test". That means they don't do the homework, they place trades without preparation and they allow the market to educate them real time. This, as you can imagine, can be painful. While it might seem like a faster way to go than to do all that slow homework, Phil has a saying from his Special Forces days that applies big time to things that are dangerous: "Slow is smooth. Smooth is fast".
Don't be in a rush. Prepare, take it slow and get it right the first time. Its faster in the long run.
We just entered another new 10 day low this morning so now I think we've entered into a trade that could be a problem. Statistically speaking, 7% of the time the 10-10 trade will lose. In this case, it is still premature to think about closing it out as we will not know for another 8-10 trading days if it is, in fact, a losing trade. On the flip side there is still a good chance it will be a winner.
If we used good money management and did not allocate anything to this trade other than a piece of our risky-biz cash or if we did the 22 trades over the last year and as a result of that success we've already built a solid cushion of profit to feed a small loss into, taking a loss here isn't a problem. Its just part of the game. We strive for perfection but it alludes us.
One last point: I do not endorse rolling all profits into the next trade. It is too much akin to keeping your profits on the blackjack table. Eventually you'll have a bad hand and lose it all. This would be an epic money management failure as a trader.
On a side note, the 10-10 system is a great way to identify an oversold market 93% of the time and all investors can benefit from the signal if they are looking to re-traunch at a new low. This signal can be used to reduce risk if used appropriately.
Also let me note that I have a few students who try to guess which 10-10 trades to enter and which ones to sit out, some who rely their gut instincts and some who go so far as to change the system completely. If you are doing any of these things please consider these a sign that this system may not be appropriate for you.
Onto the RUT system.
The RUT system we teach has not had a losing trade in 18 months. Given the last 18 months of market machinations, I think this track record suggests its a pretty robust system. If you follow the rules, the results are consistent and compelling.
That being said, on occasion, I get calls from students who want to talk about the best adjustment for their trade. Let me remind you here; If you roll a position up and out or down and out, please note what you are doing is closing a trade at a loss and then placing a new trade to recoup the loss. Its not rational to treat the rollout as anything else.
I like the first part of the adjustment as I feel the best adjustment to a losing trade is to close it. Once closed, I would use the steps we taught you to see if it makes sense to place a new trade at that time. In the case of the recent February RUT trade, we closed at a profit and then did not enter a new trade for March since volatility was too low. If you were in a losing trade in February, by the same logic, rolling the trade forward would have been a bad decision.
I also have encouraged all traders to back test the RUT system to see how it has performed for the last 10 years. You'll see that it has been one of the most consistent strategies in the market. For those of you who are coming in Atlanta, you are going to love it, and I'll show you with real data how we made money in January, how we made money with no adjustments needed in February and why we stayed out of March.
Here's my main points: Always backtest a system, paper trade until you are comfortable, build into your trading plan what you are going to do if the trade goes against you, never trade money you cannot afford to lose, and never over-allocate in a leveraged instrument. Remember, the market can stay irrational longer than you can stay liquid. If you have a trade that goes the wrong way and you are losing sleep over it, you either did not backtest the system to get your head right or you over-allocated and can't take the loss with equinamity or this simply is not a system that fits into your personality.
See you in Atlanta!