Factor Commentary, December 3, 2018 — Risk management in a day of craziness

First and foremost, I consider myself to be a risk manager. Only after this role has been properly served do I become serious about trading.

An apparent truce or agreement between Trump and China over the weekend sent a number of markets off to the races Sunday afternoon (U.S. time). Included among these markets were several I had under review for possible trades this week.

There were two reasons why I refused to act on possible trades in Soybeans, Soybean Meal and Copper.

1. In thinly traded overnight markets I generally do not use overnight entry stop orders and quite often do not carry overnight protective stop orders (on existing positions). Overnight stops orders are a ticket for HFT and algo programs to rob us blind.

2. Capital preservation and risk management trump any consideration of a chart pattern.

Soybeans opened 25 cents higher, Meal opened $9 higher and Copper opened 535 point highers. Under these circumstances there was no way I would have entered “day-only” stops in preparation for daytime trading hours.

Let’s say I would have bought Soybeans 25 cents higher at the open Sunday afternoon — this would have meant a 150 BPs risk to Friday’s close. And a move back to Friday’s close would not have meant anything technically. So, why should I take a crap shoot for 150 basis points motivated by FOMO? No reason I can think of.

So, what’s next? For me, nothing. I will now take a pass on Soybeans and Soybean Meal for now. Capital preservation  must trump any upside implications of the chart.

Those with deeper pocket books than I are welcome to the markets I have decided to skip over for the remainder of the week.

plb

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