“Why Are We Losing Money?”

From 2013 to early 2015 my firm, Melissinos Trading, profits from some glorious trends – crude oil falls 70%, stocks rise 40% and the U.S. Dollar rallies 20%. Since then, performance stagnates. Over the past two years, many markets move sideways and exhibit nasty V-shaped reversals. As a result, our long-term trend following strategy takes many small losses as we buy near tops and sell (or short) near bottoms.

I want to show you how and why we have been losing money over the past two years. Below, I illustrate charts from different sectors since 2013.

In 2013 and 2014, we produce annual profits of +10% and +38%. Trends were smooth and persistent, which made our lives easy.

From 2015 to 2017, we lose -9%, -1% and YTD we’re down ~3%. Over the past 2+ years, trends are scarce and choppiness is plenty. In these environments, we rely on our risk management to keep losses small and we just wait it out until trends come back. When they do, we have the capital to take advantage.

I believe the charts below can help answer the question many have been asking since 2015: “Why are we losing money?”.

Stocks

S&P 500: We profit from a steady uptrend in ’13-14. We give back some gains and then get short in 2015. The short doesn’t work and we take a couple small losses. We get long again in mid 2016 and it has been profitable lately.

Hang Seng (Hong Kong): We profit from a choppy, but in-tact trend throughout ’13-14. We give back profits and take a loss during the major reversal in 2015. During that reversal, we get short. It works for a while but another violent reversal hurts us again. Like the S&P 500, we’ve been long since mid 2016.

Bonds

U.S. 10-year Treasury: We profit from the nice downtrend in 2013 and mostly hold onto profits during the 2014 consolidation. We get long in late 2014, but we take many small losses during the nasty chop of 2015 and 2016. Our short position since late 2016 has been profitable so far.

Euro BTP (Italian Bond): We profit from a picture-perfect uptrend in 2014 and early 2015. The fun ends with a nasty reversal and sideways action until late 2016 (when we get short). Like our Treasuries short, it’s been profitable so far.

Currencies

U.S. Dollar Index: We made a lot of money riding the uptrend from mid-14 to early 2015. Since then, we take several consecutive small losses as prices chop up and down. We take a small loss in our mid 2016 short position as well. Markets that oscillate in a wide range are the worst kind of markets for our strategy.

Japanese Yen: We profit from a gorgeous downtrend in 2013-2014 then lose money in the choppiness ever since. Notice a theme here?

Canadian Dollar: We profit from an even stronger downtrend from 2013-15 and then give back profits during a nasty V-shaped reversal. Getting long in 2016 hurt when momentum stalled out. This market has been more or less dead since 2Q16.

Commodities

Gold: Our short position generates decent profits during the downtrend from 2013-15. Then a V-shaped reversal knocks us out of our short position causing us to go long in 2016 for a while – but then proved to be unprofitable as well. In late 2016, we get short in 2016 and prices make another V-shaped recovery which hurts us again.

Crude Oil: Christmas came early in 2014 when prices broke down and never looked back; that is until another one of those v-shaped reversals occurs in early 2016. Like all trend followers, we give back profits at the end of the move. We take a long position in mid 2016, but performance has been slightly negative due to our shorter term system losing money in the downward spikes.

Orange Juice: One of the bright spots in 2016 came in one of the most illiquid markets we trade. Because of this illiquidity, we don’t take a large position (part of our risk management rules). We make money on the long trade, but gave back some profits at the end when prices violently reverse downwards.

Soybeans: Soybeans can go to hell. It shows promise in 2016 when prices rally ~40% (while I’m on my honeymoon). Naturally, I get excited and think maybe this market is finally waking up and it can help us get out of our recent drawdown. Nope. It turns out to only be a quick pop and then moves right back down. Since, it’s been nothing but a sideways disaster.

Lean Hogs: The past two years see smooth short-term trends. Sadly, we’re long-term trend followers. By the time we take a position, momentum exhausts shortly afterwards and prices reverse. We experience three nasty reversals over the past two years. Awesome.

Corn: This market has acted like Soybeans, but worse. 2013-2014 were solid, but it’s been nasty ever since. We give back profits at the end of the 2013-14 downtrend like we always do. Then we get long in 2015 which doesn’t work. We get short in early 2016, which doesn’t work. Then long in 2Q16, which doesn’t work. And now our short position hasn’t been working since mid 2016. Fun times.

Disclosure

Past Performance is Not Necessarily Indicative of Future Results
There is always a risk of loss in futures trading.

This communication is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of Melissinos Trading LLC. All information is subject to change without notice.

These charts show examples of trends. Inclusion of a chart as a trend example does not imply any kind of recommendation to buy, sell, hold or stay out.

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