Positions update + a new one
And when to close a trade
In August this year I talked about 2 positions which seemed interesting to me. In October, I added a new one. Let’s see how it all went. I will then talk about another one which seems interesting to me at the moment.
These are the 3 long/short* positions to date:
*Long/short means we go long an asset or security, and short another one at the same time. I use a lot of these strategies in trading. It is commonly know as “spreads” or “ratios”.
First, a long S&P500/Gold trade was discussed here (long S&P500 and short Gold).
Then, a long WTI/NatGas trade was discussed here (long Crude oil and short Natural Gas).
Finally, a short Gold/Silver trade was introduced here (short Gold, long Silver).
Bear in mind: Long A/B = Short B/A
When we say Long a spread, it means long the first leg and short the other one.
When we say Short a spread, it means short the first leg and long the other one.
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The Ratio was at 2.43 when I first introduced it (Aug 18, 2022). Today, it’s at 2.26, which represents a 7% loss. The ratio even went down to 2.11 in October, so that makes a drawdown of 13.2%.
Let’s take a look at the chart:
To me, the fundamentals have not changed. My view is that S&P500 will outperform gold in the next coming months (and years).
If we take a step back, we see that we had a low in 2020 at around 1.50:
Since 2011 actually, the spread is in bullish mode. My take is that it will continue to go up.
The idea here was to go long US crude oil and short natural gas.
The Ratio was just below 10 when I first talked about it (Aug 31, 2022). It went up to 15.60 in October. Today, it’s at 12, so that is a 20% gain. End of August was the (current) low. In my view, the position still has upside potential. Soft target was at 20. But to be honest, the momentum is not that good currently.
Let’s take a look at the chart:
It might be safer to close the trade ASAP, and see how it goes and maybe enter again in a few weeks.
Global macro economic outlook does not look good, especially if we look at PMI indicators. This would lead to less demand, hence lower oil.
However, OPEP including Saudi Arabia could decide… whatever they wanted, including lowering output to keep the price up…
Anyways, we saw natural gas prices recently having some big moves upside…
As I mentioned in this post, this is a pure opportunistic trade, based on nothing more than historical volatility.
Although since 2017 the ratio had a range between 10 and 25, it can go well below 10:
The recent top was 15.60, which means that at 12 (trading currently at), it is down 23%. That’s another point in favour of closing the trade, as I’ll discuss below.
In October 19th I talked about this spread. The idea was to go short gold and long silver. It was at 88. It’s now at 83.64 which makes a gain of about 5%. It went down to 80.
Although it bounced up, my view is that silver will continue to outperform gold in the coming weeks/months.
As I said in a previous post, I’m already short gold in the first position, which is long S&P500/Gold, meaning Long S&P500 and Short Gold.
With various positions like this, it’s good to be aware of any redundancies, or opposite trades.
IF instead of going short gold/silver, I had decided to go long gold/silver, it would mean I’m long gold (in this position), and short gold on the other position (long S&P500/Gold)…
…and that would be silly.
My global view on gold is bearish, and I short gold on the two positions.
Let’s look at the long term chart of the gold/silver ratio (a lot of downside potential):
What about closing positions ?
Having a macro view and entering positions is great. But when do we close them?
My rule of thumb is that when it is down 20% from the top, I’ll close the trade (if I’m long).
Or, I could decide to close a trade if it “comes back” to my entry point.
That being said, it really depends on the confidence I have on the position, and on the probability of the desired outcome occurring.
This is really a question of money management.
Another way to close a position would be if the technicals don’t look good, and the ratio broke some kind of technical support or pattern.
It also depends on the P/L (Profit and loss) of other positions, and the overall portfolio.
If I’m long and the ratio goes down 20%, I could as well decide to add some more.
Again, it’s all about global P/L, probabilities, confidence and amount of research I did.
Now, for my beloved paid subscribers, here is a new position I’m working on:
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