In a corporate setting, you most likely will have your entire retirement plan set out for you very cut and dry with different risk adherence to your age and financial standings. Often simplified to a level of picking package A, B or C – all of which are comprised mostly of diversified mutual funds through your company pension plans. Mutual funds to most are seen as investment vehicles of stability, tortoise and the hare style so to speak. The fund manager is an experienced financial service professional with more Ivy League degrees than Stephen Hawking. With such magnitude of experience and assumed intelligence behind its operation, mutual funds are a great thing without failure – right?

To me, mutual funds are awful investment tools and have lowered everyone in the working class down to the investment denomination of a dimwit. Mutual funds don’t care to provide positive returns each year, all they want to do is beat or stay at par with the major indexes. When they beat the indexes, they look good, even if the market is down 30% that year. They also charge a significant management fee regardless of performance to put salt on your wounds on poor performing years. So why would somebody entrust their money with these exuberant bloats of disregard to the success of those within their fund? Because they simply do not need to and you really have no other way around it besides burying your money in a jar out back, waiting for impending doom and total financial collapse in which you can emerge with a smug face saying that you were right.

Investment engines are unfortunately scarce for those making a typical household income, say $100k; just because you are not seen as an accredited investor. The accredited investor requirement however is a great system, only because it protects those down to the lowest denominator of human intellect. It would be like opening up a worldwide casino which you can only gamble your retirement money if such a rule was not in place. I could only imagine the dimwitted population who would ride it all, and complain that the system is corrupt when they lose everything. Of course once everything is lost, the government will need to step in and help the poor, dumb people out making the situation even worse.

Quite simply, the problem comes down to the lack of due diligence of the unaccredited investor.  Not understanding risks involved with alternative investment options, not understanding the strategy of the managed in which they are vested in, aligning secure investments such as fixed income when nearing retirement and not investing so much in a single investment that if wreck turns to ruin you cannot survive financially. Bottom line with alternative investments is that you should never risk more than you are willing to lose.

So that is why the rich are getting richer and the poor are in the same boat they were a decade ago. While the rich are accredited investors who can utilize absolute return alternative investments such as a hedge fund or a managed futures fund, the poor and middle class tries to hold on to the mutual fund which simply does not perform and cannot generate much more than fighting inflation. It takes no scientist to draw out compounding returns of an absolute performance fund to that of a mutual fund to demonstrate that this gap will widen indefinitely and exponentially.

All of that stuff sounds very scary, and can be very harmful towards our economy, so what do we do now? Start shorting everything and wait for the doom to strike with triumphant force, hoping that illogical movements apparent in the beginning of this year will correct and light of reality will once again shine forth? Don’t hold your breathe, at least for now.

Doom and gloom will always exist, in any economy at any given point in time. Events in which could happen and could in fact crush the sanctity of your portfolio will never not be lurking. Human emotion will naturally gravitate towards the doomsday and the “what if” situations of events that will not likely have significant impact to the trajection of equities. The weight of fear will dampen ones acceptance to ride the wave and will encourage early evacuation. The news media operates in a similar nature in that it utilizes stories of fear and gloom to captivate an audience, simply because it will generate a higher number of viewers. From the perspective of somebody who only watches the news to gain insight on the outside world will not see the positives of reality. Heading back to the relation with the markets is that things aren’t all that bad and according to the markets as a whole, this is being reflected.

This is not justification to sit in a bubble of naivety and think that nothing bad can happen, because it certainly can and if history is any bit indicative of the future, it will. The point which I would like to make is that you cannot predict when these events will either happen or when the markets will take notice and weight them accordingly. By being aware of the possibility, one can remain at a level of solvency while taking advantage of the movements at hand. If you were to ride this wave from the later parts of last year into the current and perhaps the future would have generated a hefty return. Be wary and ready to react to the possibility of a correction, but don’t bet heavily that there will be and certainly don’t reverse simply because you think doom is around the corner due to the current proportionately lofty levels.

Some traders I believe are ones to fight the pattern in attempts to defy actual probability. In a simplified scenario of possible reactions to abnormal occurrences is a stock advancing or declining for 10 days straight is justification to leverage into the reverse. Bear with me as I understand that stocks don’t move on static odds such as 50% up or 50% down as many market factors impact the price. The relation I am trying to make is that no discernible relation between probabilities exists between the moves of any security. Trying to defy the momentum bases solely on, “what are the odds of that happening again?” will never be an effective strategy to trade upon.

The market is defiant and always like to mock rationality by reacting in very peculiar ways. Quoting that something cannot possibly happen due to extreme conditions can surprise the most savvy traders. Acting upon false probability on market patterns is a fool’s gamble without solid actionable data.

Many of my articles are reiterations of an underlying message, and that is to stop predicting and start reacting. My personal belief and trading strategy is foundation on that of reactionary trading and being patient until the right opportunity becomes apparent, mainly through use of basic trend following principles. Momentum applies in physics much like it does in the market and I use that to my advantage.

Before you give me a weird look or come at me with a big ol’ pucker, let me first explain this acronym, how it pertains to trading and how it curtails into successful trading. KISS, besides the legendary rock band, is to Keep It Simple, Stupid. While I don’t mean to offend with the second S, it is what it is.

This article is to define ground lines of over analyzing which very often accumulates into analysis paralysis. Due diligence, research and theorizing is all good and I don’t discredit a single bit of it, but is it possible that too much can actually hinder the accuracy and effectiveness of your trades? I personally believe that you can.

I believe that initial trade ideas are from the very instant you conceive them, biased to where you want it to go. This doesn’t take a minute or two, I’m talking almost instantly. When you have this initial trade idea with expectations of being correct, you go out to find information to support your thesis. This information comes from fundamental, speculative and technical perspectives; it’s all the same. Here is the problem though, your initial bias on the trade will filter this information mainly to support, not go against your very subconscious beliefs. While you may not totally discredit anything that supports the opposite of your thesis, you will simply apply more weight behind that which does until it goes in your favor.

Speculation is inherently observation, experimental and pure to human ego and emotion.  Thinking too much will get in the way. While this hindrance is cornerstone to many informational pieces that are accumulated to make decisions. Every financial publication uses mountains of data to attempt by any means to connect the dots between economic cause and market effect. The rationale is vacant in most market moves regardless.

Several experiments have been performed in the past to correlate the amount of information accumulated about a patient by doctors to their effectiveness in ability to diagnose an illness. Through these studies, they have shown that the relation between the two does not exist. Another study was done with psychologists, patient information and diagnosis. Again, increasing knowledge yielded no better results but did significantly increase confidence.

So what am I saying? Scoff off all information in attempts to endorse or conflict your trade thesis? Absolutely not, I’m talking about KISS! No amount of information can one hundred percent accurately predict and make sense of the irrational and illogical movements of the market. That’s really why the markets exist in the first place, they are far from efficient! Look at what matters most to draw a clear picture, not to get convoluted and complex as to recreating the Sistine chapel.

Simple does not mean easy, they are far from synonymous in this particular situation. Most of the marketplace is spent on defining rationale than it is establishing method. So KISS, keep it simple, keep it real and keep trading.

The market is cold and emotionless, it does not care about you. It does not hold any stance on your portfolio, your emotion or your wishes. It will just keep on moving whether you like it or not and no amount of prayer can stop it. You should be adapting, not hoping because like the great Benjamin franklin said, He that lives upon hope will die fasting.

One of the most coveted aspects of trading is the desire to be right. Learning to appreciate, understand and adapt to various market conditions beyond the illogical moves from a fundamental basis tends to be cast to the wayside. Attempts at outsmarting and predicting the “it should” will cloud rational judgment and promote irrational trades against what is actually going on and where the market is moving.

This recently bull run was fantastic for many and has made many people and institutions a whole lot of money in a relatively quick period of time. It has also, albeit unfortunate, evaporated the wealth of supposed astute investors. You may be asking, how could such a good January be detrimental for any investor? The answer is that many have bet on the logical facets of market movement citing overbought factors, labor participation rate, Baltic dry index, earnings, VIX and other speculative and fundamental arguments that take the bull run head on screaming, you’re wrong. As genuine and valid of concerns they may be, and may in fact reflect itself in future market moves, the judgment of the now is blind. Run with the bulls, not against regardless of what logical fallacies exist presently.

Bullish price action as of recently is definitively firm and it is your job as a trader is to be aligned with that trend as long as it remains that way. This by any standards does not give reason to ignore the illogical facets of the trend against strong evidence, but to accurately weigh the risk and potential of fundamental appreciation in the future. It is apparent and continually so to remain bullish until there is strong price evidence to state otherwise. Staying nimble in such an environment will allow you to move quickly and precisely as any changes cultivate and grow.

The mighty market as a noun does what it wants, when it wants with or without logical reason. Just be thankful that the market isn’t your teenage child. Like a teenager however, you can only speculate and hope that it will grow up and make logical decisions – this however, may not happen, ever. Its agenda is confusing and irrational at times without real rhyme or reason. Save your time, effort and energy accepting instead of combating the probable, yet inapplicable facets of logic.

We have all however, done just that, myself included. Nobody has the steadfast will and discipline to be able to not attempt to debunk illogical moves in the market – it is simple human emotion to not be wrong. More times than I care to count let alone admit to but in the end, every single time I know I would have made more money and stayed a little more sane if I would have simply accepted and moved on. Dwelling on, increased frustration and tension all exacerbates the inability to perform due to misaligned judgment.

To reiterate, the scenario is easy to see, but execution is not exactly trivial due to skepticism. Let the markets move you, don’t try to move the market. React, don’t predict and leave the skepticism behind. Stay solvent, remain rational and logical, but don’t expect the market to see eye to eye with you.

The answer truly is none and neither, only a culmination of the two will hold the best fighting chance however I have a distinctive spin on the merger of these two key trading methodologies which uses price to summarize fundamental beliefs and back technical theory. That theory can be summarized as follows:

Price is the ultimate information medium; it is the consensus vote with all things being equal including public and non-public information. Traders (generalized as technicians) and investors (generalized as fundamentalists) compile their information, develop a thesis and cast their vote; buy or sell. Based on these “votes” the price reflects the consensus of movement.

The price is a marry of both methodology of trading because that is exactly what it is, the combined consensus of all traders regardless of trading style. It does not matter if you trade on the stars, coin tosses, football games, your cat or anything else. Majority beliefs will drive the markets in that direction.

Trends exist in securities, which should be of no shocking value to you. Momentum of the majority vote will continue until something of impactful nature changes. When top or bottoms become apparent, the vote is changing because thesis’s change as the price moves. Something that has moved up considerably may have less appeal to be purchased in fear of a strong retracement; many may have price targets and take some profits off the table at a certain level. On the contrary, a strong decline has reversed effects. When the majority thesis changes, markets react and move accordingly.

I have witnessed many people who attempt to predict bottoms or tops because it’s at its highest period high, or at its lowest period low. That thought process to me is flawed in many ways because one, before a stock goes from 30 to 100 it needs to hit countless highest highs and before a stock declines from 100 to 30, it also needs to hit countless lowest lows. Which crystal ball are you using to predict such a thing? I’d very much like to borrow it. Fighting momentum to predict is stepping in front of a train, moving with momentum on a reactionary basis is recipe for success.

In life, being a leader is always the preferred way to go, but in trading, leading can get you hurt if there is nobody to follow you. Let the market do the moving and leave the predictions to the gypsy. Jump into a trade when the momentum and price consensus is in your favor and if it backs your own personal fundamental or technical analysis, the better!

Silver and gold are the only too elements that, according to our constitution can be used as money. In fact, the original dollar was officially defined as having a value worth the weight of roughly one ounce of pure silver. While there is no longer any official transferable weight between the dollar and silver, it is still used and readily so as a hedge against a falling dollar and can be traded for other currencies and goods throughout the world – much like gold.

Because both silver and gold are tangible goods, there should be a very concrete and defined ratio between the value between silver and gold based on the total amount of metal available on planet earth seeing that demand being equal in the monetary investment front. Geologists have concluded that the ratio between silver and gold on earth is between 7-16 to 1. Simply meaning that for every ounce of gold available, there is between 7 to 16 ounces of silver. To date, the total amount of silver mined is 46 billion ounces, gold at 5 billion ounces. This number coincides with the aforementioned ratio, backing that speculation. All things being equal, that relation should be directly reflected in the price of these two metals and through history it has, but over the last half decade, gold has blown by without much more than a glance back. Today, the relation between the values of gold to silver is a dominating 51 to 1. In order for silver to catch up to gold with a historical 16:1 ratio, silver would have to move up to nearly $110!

On the fundamental side, silver demand is well surpassing the amount being upheaved. While some mines are more specifically geared to mining a specific precious metal, gold and silver are often a byproduct of the main mining objective by volume – typically copper, zinc or lead.  The reason for this is that mining specific metals, like silver, is that it costs more to mine it independently than its current market value. When the price of silver moves up, there is not an instant increase in production because the production of silver is dependent on the production of other industrial metals. For the past 20 years, the demand for silver has outpaced the supply from mining operations. Since 2000, new mine production has only met 72% of total demand. This is a recipe for a lit fuse in a silver boom.

Unlike silver’s yellow counterpart, there are far more industrial applications for silver than gold, not simply because of its price, but because of its unique elemental properties. Silver is used in nearly all electronic components in consumer electronics and is the most electrically conductive and thermally conductive element out there. The demand for silver in industrial use is highly inelastic meaning even if the price jumped to $100, the demand would not be likely to fall by any means. Industrial applications consume nearly half of the total silver demand.

The world is on the brink of the greatest transfer of wealth in history and paper will not be able to maintain its intrinsic value. Emerging and growing economies are also capitalizing on the growing demand for precious metals. As of recently, due to uplifted and easing government policies regulating the sale of precious metals, more Chinese citizens are finding a sound investment in gold and silver. Until only a couple of years ago, China was a net exporter of silver (3^rd largest silver producer as of 2009) now, they are major importers of silver of 3000 metric tons in 2010. Their import level is about even with their production amount. Imports in India are also increasing 20% to 1200 tons this year.

The outlook for intangibles is looking weaker as time goes on while physical assets continue to flex. Even today in the COMEX, open silver contract shorts are FIVE TIMES the amount promised to be delivered than there is actual physical supply. So even if 20% of those opted for physical delivery, the entire silver supply in the COMEX would be wiped out.

It is only a matter of time until all of the pieces of this puzzle align and the devalued silver makes a sprint to catch up to its big brother. Until then, keep watch on the shiny things.

What are asset classes?

There are two main categories for asset classes, Traditional and Alternative Investments, each includes a set of assets which are commonly invested.

Traditional Investments:

Cash
Bonds
Equity
Real Estate

Alternative Investments (Including but not limited to):

Hedge Funds
Managed Futures
Private Equity
Credit Derivatives

This article will take a look at managed futures and their ability to provide outstanding risk management while keeping a high return portfolio.

So what are managed futures?

Managed futures are funds managed by Commodity Trading Advisors (CTAs.) These trading advisors manage client assets on a discretionary basis using global futures markets as their investment medium. CTAs often operate with absolute return and require minimal (if any) management fees with their main source of income being completely performance incentive based. With the ability to enter both short and long positions, CTAs can remain vigilant and profitable during any market conditions, unlike most funds which can only ride the elevator up, but can’t go down while the only way to get down is to jump.

Managed futures have gained a tremendous amount of interest over the past couple decades after they have proven to be an effective way to cushion some rather turbulent traditional markets in a diversified portfolio. Overall, assets under management for managed futures as grown an unprecedented 500% to close to 300 billion dollars this past decade alone with growth of 1400% from the 1992. Still, managed futures are dwarfed in size compared to the assets of hedge funds, with 1.8 trillion under management.

Correlation between managed futures and traditional assets

Futures, by nature tend to move independently from traditional markets. Most futures (commodities) are physical goods that  have a definite value to civilization while money, which is backed by all investments on the stock exchange, does not have any value but the value we put on our currency in society. With that being said, it is not difficult to imagine that when people begin to not trust the value in their traditional assets, they put more into physical assets. This is very evident in the futures of gold and precious metals as market uncertainty peaked. Not only can the physical assets of futures help reduce portfolio drawdowns during poor market conditions, but they can also greatly accel when times are good for stocks. When the markets are prosperous, futures also do well because the demand for the physical goods goes up as more building and consumption takes place.

Drawdowns at a minimum

Managed futures boast this lowest drawdown in comparison to all major indices. The main reason for this success is that managed futures are able to short and take advantage of falling markets while indices of course, cannot. CTAs often adhere to very strict personal trading rules which keep discipline and strategy at the forefront of their success.

How are managed futures managed?

Commodity Trading Advisors (CTAs) is equivalent to that of a fund manager at a hedge fund, they oversee all trades that are made and are ultimately, the decision maker. Many CTAs fall under the trading strategy category of trend following. Trend followers often use an automated trading system using simple to complex trading algorithms to make all trading decisions. This leaves the discretion of the CTA out of the picture and allows the system to run its course. Trading on an automated system requires the discipline to not intervene on a day to day basis.

Trend following is a means of trading on already apparent trends, with the anticipation of the trend continuing further in that direction. The most notable function of a trend follower is risk management. By adhering to strict rules in their trading strategy, they don’t let hopes or ifs skew the reality of the markets. They base a lot of their success on the few home runs out of the many single base and strikeouts that they may have.

Summary

Managed futures are becoming a fantastic investment medium that can reduce risk and increase returns in a multitude of different market conditions. Commodities are sure to be with us for the long haul so why not put your future there?

Analysis paralysis is a real thing and as many who have mottled their charts with oscillating this, momentum that and moving whatevers know – they begin to start noticing a pattern and that pattern is with enough technical tools they begin to offset one another and tell conflicting stories.  When indicators tell conflicting stories, the trader no longer reacts accordingly to the data that matters most. I believe that many novice traders put too much emphasis on technical indicators in attempt to find the Holy Grail of prediction accuracy. The problem with predicting future prices is that you would have just as much luck finding magic beans that grows into a money tree, that being – you really can’t predict price movement until the movements have been made.

While you start thinking that I’m full of hot air – riddle me this. If there were any possible way to accurately predict market price movements 100% of the time, the markets wouldn’t exist. Technical indicators use past and current data that depicts patterns relative to its current price and volume data. It never says where the price is going, it only indicates the pattern AT THAT TIME but until the price moves, it can’t predict squat.

This article isn’t intended to bash or discredit the use of technical indicators as they are great tools but I wish to advise that they cannot and will never be able to predict price. Price depicts price and price is the best indicator of where price will move.

Patterns in pricing are to me, the most definitive method for spotting and entering a lucrative trade.  With knowledge of their levels and pricing history, you have a better stand at getting price movements right. Trend following is a term that comes to mind when I put emphasis on price patterns because the best way to capitalize on price movement is to follow where it has already been moving on both the short and long side. Here is a “What-if” scenario – When approached with a constricting wedge pattern which has a strong possibility to break out heavily to the north or south, where do you want to be? Do you wan’t to place your bet predicting where the breakout will happen to capitalize on maximum price movement, despite the risk of being on the wrong side? Or, do you want to be on the sideline while the trend breaks and when it does, you jump right on with it. Sure you might lose a little on the bottom end, but the ability to stay more risk averse outweighs the slight disadvantage of losing optimal price. I think that I’ll wait.

To attempt to capture the best level of entry and best exit position is like trying to shoot an apple off of your sister’s head from 100 yards out. Sure, it can happen where you do capture the optimum price or manage to hit the apple but the bottom line is that if you miss, it can get ugly. If you manage to get the optimum price, more luck was involved than skill and knowing.

So de-clutter your charts and look at what really matters – the price! Understand the patterns that occur and use technical indicators to confirm and support your trading prowess.

‘Better than’ is what we as humans generally aspire to, we don’t ever want to be second best, it is in our nature to be the greatest – always smarter, always faster and always right; anything less is a sign of weakness. To be the loser in a 2-sided battle evokes the very idea that you may not be worthy of, incapable of, dumb or inferior to your competition. The truth about trading and the zero-sum game associated to that is nobody is ever always right, no single trader has effectively hit 100 and more surprising may be that some of the greatest traders, lose more than win. So what gives? How can the best traders lose more times than win, yet have the most coveted returns in the industry?

Risk management and the ideology of letting your winners run and cut your losses short is how they remain solvent through their trading and allow them to capitalize on their more sparse victories than trivial but abundant losses. Losing trades occur and will occur often, no market voodoo will change that very fact. The key is to realize when a trade has gone sour and when to put your ego in the backseat and amount to your bad trade. Like most things in life, that’s much easier said than done – however, one can develop the plan and the discipline to follow through with pulling the trigger and saying enough is enough.

When trading you must determine where your bottom line is, at which point you must close out of your losing position and scoff it off as a lesson to be learned. Forget the notion that ‘it could come back at any moment’ because, guess what? It could also and more likely so, keep moving out of your favor until you’re blue in the face. Be thorough and defined with stop losses and stick with them, when you let your winners ego rule your trading decisions it will ultimately be your kryptonite.

By being keen with your loss prevention techniques won’t ultimately turn the tides in your favor. On the other side of the field you will need to grasp and endorse the concept (proven concept, I might add) of letting your winners run. Stop limits are inhibitors of profit, they state that you know where the top is (you don’t) and that you are satisfied by pegging a set percentage or static price goal. Let me reiterate my first point of that stop limits mean that you know where the top (or bottom if shorting) is. Despite what type of trading guru you may think that you are, you really don’t know when a stock will peak – nobody does. Guessing the top and bottom is a fools game. When a trade is profiting, that’s good, that’s exciting, but why would you cut yourself short and limit out? Let your profits run, run until you see a prudent and defined reversal of the price trend that you were riding. Not cashing out early also takes an immense amount of mental discipline but with a steadfast plan, you can succeed.

Sure trading is a zero-sum game which one must lose for another to profit but that should not inhibit your abilities as a trader. Because you either win or lose, you only need to be better than 50% of the people. You’re better than 50%, right?