Last December, nearly a year ago, I wrote about being ready for a market drop and buying UVXY to capitalize on it. I largely focused on the 10x gain potential that was realized in 2020 and 2008 with VIX spiking to 90. What I didn’t consider was the massive compounding returns from multiple trips of 20%+.
Recently, I wrote about “The wacky world of natural gas!”, noting that “I have purposely never written here about natural gas because it can be a very difficult trade due to its large gap moves, especially over the weekend.” That aspect remains very true, but the big, chaotic moves can be very, very rewarding, if you’re willing to trade accordingly. You can also enjoy large gains on large moves, but, as with UVXY, the compounding returns of multiple trades is undeniably effective.
For much of the year, BOIL and UVXY were matching each other for potential gains. NG was going to ridiculous high levels so it wasn’t sustainable. Sure enough, it topped out in June and then KOLD was king for a month. BOIL took center stage again for nearly 2 months, then KOLD wrestled back control in late August.
Since Oct. 24, BOIL has also been the winning trade but you might not think it was a significant winner by looking at the NG chart above. The math paints a very different picture.
That’s an impressive +208% in 4 weeks, yet the best trade was ‘only’ +36.8%. That’s the power of compounding returns. Meanwhile, I’ve been focused on KOLD since the fundamentals ‘clearly’ support a lower price in NG. One of the guys, Greg, who has made large profits on NG for years, is also adamant that the price of NG is too high. He’s currently underwater 14% since starting his trade on Oct. 26.
The issue is not whether it’s possible to time the market. We all know that it is completely possible to time your trades reasonably well. Greg is particularly good at timing his buys. The issue is whether to hold when the trade turns against you or sell and wait to re-buy. I say it’s best to sell. The math agrees. Doing it, isn’t so easy.
I’m not able to buy KOLD on my platform, so I buy HND which is very difficult to trade since stops get jumped over and the buy/sell spread can be 5 cents or more. Still, I do trade some. Even trading poorly and completely missing big drops because I wasn’t around to trade, I’m down 4.7%, which is better than Greg’s -14%, but horrible compared to +208% with BOIL. Ideal trades in KOLD gave a solid return of +85% on 3 trades.
Note, having sold all of my HND on Fri. Oct. 21, I foolishly bought some back at a discount, since I felt NG was going lower. That was despite knowing that JC bought BOIL the day before (and was now underwater) and perhaps I didn’t look at the chart for UNG which was a screaming buy for it and BOIL. Then I added to my short position the next 2 days since it was -14% and then -23% from where I sold. What are bargain! NOT! What an idiot!!
Fundamentals are important, but clearly NG was ready for a rally, and it did. So why re-buy and let my winnings slip away? I wish I had a coach who could have benched me! At this point, there’s no clear trade and I simply hope that fundamentals will take control again, finally.
So, what’s the lesson? Greg is absolutely correct that making large bets is the only way to radically change your financial position. Another member pointed out the math:
1: 150% NG gain on a 10% position = 15% portfolio return
2: 100% NG gain on a 50% position = 50% portfolio return
Trader #1 must also generate fantastic returns in other areas to close the gap.
Holding on for a ‘large’ return will never match compounded returns, and there’s no reason you can’t start with a ‘large’ position versus buying more, cheaper, as you sink deeper underwater. How is that even logical, yet we all do it? Remember that to get back to breakeven from being down 50% requires a rally of 100%. And some more math: 8 gains of 10% compounded gives a return of 114%.
Let’s also not forget about opportunity cost. While Greg and I and others focused on KOLD for the past 4 weeks, not only are we underwater, but we missed out on 208% with BOIL. Fortunately, my big position in KRR moved up 50.8% and I’ve been trading it effectively since writing “Get Ready to Back Up the Truck” in July. I was also on board for the +100% ride in SOXL, but with a tiny position as I wasn’t ready for the markets to blast higher after the last CPI report.
JC has clearly shown that it’s entirely possible to consistently trade for 10-20% returns often within a few trading days. The lesson I’ve learned (again) is to stay out after locking in a big gain and the charts say it’s time for a reversal. Remember, “Cash is King, not dead money!”. Cash can’t drop 10-20% in value and cash ensures you’re ready to jump on the next opportunity when it comes along.
Years ago I was playing a solitaire card game called ‘Calculation Solitaire’. I started winning often and began to wonder if it was mathematically possible to win every time. Just Solitaire shows daily winning statistics and it’s always around 40%, yet it is mathematically possible to win every time. I remain convinced that trading is the same and JC is the first person who has shown me that it is.
We can’t all aspire to playing hockey as well as Connor McDavid and few of us can learn to trade like JC, but we can all learn to win at Calculation Solitaire and trade successfully, maximizing the power of compounding returns. Once you’re consistently winning, then you can add some zeroes to your bets.
One SeekingAlpha author commented about the foolishness of trying highwire walking and compared it to trading and trying to time the market. I replied that timing the market was completely possible and that it’s fun and safe to try slack lining. Once you can slack line a foot off the ground, you can then try 5 feet and 10 feet. After that, just add zeroes and you can still do it.
All that’s left now is to decide what you want to do and get started, whether it’s slack lining, calculation solitaire or trading successfully. I have mastered one of the three and hope to master the other two.
In review, the math says make large bets so that it really impacts your total account value, and don’t hold the large bet when it stalls or reverses. Sell it all and be willing to trade the other direction, remembering that compound returns quickly add up to really large gains without an extended move even happening.