Thursday, July 30, 2009

Trading Philosophy

Luis Molina
Commodities Index Trader, Former Options Desk Head at Merrill Lynch Commodities
AB, Theoretical Physics, Harvard University, 1988



Trading Philosophy
http://www.commoditycareers.com/article.asp?id=18

Author: Luis Molina (Former Desk Head)

Trading can be one of the most stressful endeavors that a human being can do for a living, especially in this day and age. Markets are brutal and unforgiving to the unprepared and uninitiated. How does one turn this stress into a productive means of making a living? Well when I think about trading I always picture a racecar driver sitting in his Formula One car going around a track at top speeds. That driver is fully focused on one thing and one thing alone, the track in front of him. When sitting in front of multiple screens looking at the markets across the globe, there is only one thing on my mind, the track of patterns that appear in front of my eyes and nothing else. And what makes the craziness of that track bearable is the fact that I know exactly how I am going to react to every twist and turn that presents itself in front of me. Very little or no emotion must come into play, only the plan that was set ahead of time and the discipline to execute that plan as the markets change from minute to minute. This plan is based on many years of experience of trading markets in all types of trading conditions and environments as well many years in risk management. If you want to be a successful trader, your plan must incorporate solid risk parameters and money management techniques. This is what creates order out of the chaos in front of you. Without this plan you are helpless and at the mercy of the market and the irrational human beings driving it.

Early in my trading career, I realized that something was missing from my trading and that in order to be more successful in trading; I needed to identify and then overcome that missing component. What was missing in my trading was a major component, the risk management aspect of trading. You always hear money management but to me risk management was in fact money management. Thus, after trading for almost 7 years and not really going anywhere with my trading just having average returns, I decided to leave trading and embark on a career in risk management and spent the next 5 years learning the art of risk management. Then in 2004, I was given the opportunity to get back into trading and more specifically Commodities Trading! But this time around, I was armed with a powerful understanding of risk and how to properly measure it and quantify it in any type of trading environment. Thus, instead of trading blindly and without any particular plan in mind, I developed a very disciplined and focused approach to trading. My success in trading in the past 4 years has been driven by this immense belief in managing my risk at every step of a trading position, no matter what the product. It may be a position in equities, fixed income, commodities or foreign exchange. I search for aberrations in these markets and develop a plan with specific risk parameters and then I execute my plan. I stay on track until I have reached my profit objectives with that strategy. By being this disciplined about my trading, I remove to a large extent the emotional element and I have a clear focus on my objective. Each strategy implemented should bring a certain amount of P&L or maximum drawdown until it is replaced by another strategy or multiple other strategies. I look to hit singles but wait for the right pitch to hit the homeruns. It is a matter of discipline and patience. By taking this approach I have learned to remove a great deal of the stress involved in trading and have been able to participate in some of the most violent moves ever observed in commodity markets in the past three years.

The types of opportunities that I constantly search for are characteristic of these trading strategies: (1) Relative value trades (long one product, short another product), (2) Spread trades-opportunities that arise from the monthly index rolls or producer hedging, (3) Pure directional trades-strategies based on some set of trend following or breakout indicators to establish a long-term position, (4) Arbitrage types of trades where you buy and sell similar products and lock in a particular margin over time, (5) The free options provided from flow types of transactions that can be client driven but also market driven.

asr: first one "long one/short other" when OIL dropped 5% in a day , next day "OIL long/S&P short" can produce good result with given no PANIC in equity market , it worked on 7/30/09

Once I spot a trade opportunity that may fall into one of these types of strategies I decide how much risk capital, in the form of VaR, I am willing to put at risk on that strategy. I also determine what multiple of that VaR I am willing to accept as a drawdown before the position is liquidated. I also determine what multiple of my VaR I would like to target as a profit goal to begin liquidating the position to lock gains. This approach has a tendency to produce a Sharpe Ratio greater than 3 over time, as they tend to be risk minimizing strategies with returns being maximized over time.

The above approach is a culmination of trial and error and experimentation over many years of being immersed in these markets and its an approach that in the past several years has been the main reason for the success that I have had in my trading. My thoughts are that I am now at a stage in my trading career to take this to the next step. Namely, trade on a bigger scale by incorporating other asset classes but also designing quantitative algorithms that can incorporate some of the rules that I have developed in my own trading.

-------------

http://www.linkedin.com/pub/luis-molina/12/1a9/611

asr: same guy physics, that is why Netwon pic

* Principal at Scalar Fund Management, LLc

Past

* Managging Director at Merrill Lynch Commodities Inc

Education

* Harvard University

Connections

30 connections
Public Profile

http://www.linkedin.com/pub/luis-molina/12/1a9/611

----------
http://www.finalternatives.com/node/1941

Scalar Funds Offers SMA Equities, Futures Strategies
June 21, 2007

Scott Eisner, principal of Scalar Funds Management, recently launched a program to give investors their choice of using traditional S&P 500 equities or single stock futures to create customized portfolios in their personal accounts.

Eisner’s program is offered only in managed account formats and features a market neutral long/short strategy and a pure directional strategy similar to mutual funds. “What I’ve really done is develop a pricing model, which is very formulaic and systematic, and seems to work fairly well as a predictive tool,” said Eisner.

“My favorite use of the model is currently in the equity market neutral space although it works fairly well as a directional strategy, and can be applied using traditional equity or single stock futures. The latter application seems to be getting a lot of interest for various reasons.”

While Eisner admitted that the program is not for everybody, he said investors benefit from its transparency and lack of correlation to hedge fund indices. "There's nothing behind the curtain here, it's all in the sun light every day. Hedge fund indices investors can benefit from it because it has a low to negative correlation to market neutral indices. Futures investors and brokers are also likely to be particularly interested in the use of single stock futures as it opens completely new horizons for managing client portfolios,” he said.

The minimum investment requirement for the program is $250,000. Market neutral investors are charged a fee of 1/20 while directional investors are charged a 2% management fee.

Eisner is chief financial officer of proprietary trading firm Harrison Trading Group, which is not affiliated with the Scalar Funds. In 2003, Eisner was trading principal for the Kottke Long/Short Equity Value Fund, the precursor to his current strategy.
-----------------