2009-12-17: Dynamic tools for dynamic trading
There are several important perspectives to focus on when trading a dynamic energy market. TradingAdvisor has identified and developed a complex tool to ensure trading profit and survival in a demanding business. Systematic trading together with position sizing and diversification; diverse strategies developed for diverse markets, are ways to achieve trading success. All being part of a toolbox that enables the trader to prosper in trading an ever-changing energy market. The longer you can stay in the market, the greater your chance of monetary gain. The key to improving your chance of doing so is the implementation of a toolbox devloped for a complex market situation.

2009 has been a year of turmoil. A period of lower volatility in the power prices was seen during autumn. Markets seemed to calm down and the volatility was lower compared to the first half of 2009. The impact of the fundamentals seemed to grow stronger again, and the power prices calmed down after a time period greatly influenced by anxiety and financial turmoil. However, December shows a market where colder weather fights against climate negotiations in Copenhagen summit and nuclear outages. Trading energy is challenging, but this is also why it is so interesting! To handle this market mayhem one may choose not to trade, but then one misses out of opportunities to prosper. If you can’t beat the market, try to find the best way to stay in the game over time.

A dynamical position sizing system may help the trader to compromise between the desire to allocate risk capital to achieve optimal growth and the essential need to protect trading capital from the risk of ruin.
In trading, accurately measuring risk is a key component to developing successful money management strategies. Many successful traders consider this as being more important than trade-entry methodology. Historically, too much emphasis has been placed on entry and exit rules, whereas the determination of the proper number of contracts to trade has been treated as a distant afterthought. Knowing the statistics and probability of a system can help traders make smarter and more profitable decisions.

Risking too large a portion of trading capital per position will eventually cause even the most profitable trading system to fail. The advantage of using a position sizing strategy is to preserve trading capital during periods of extended drawdown or losing trades. Many a trader thinks about the advantages these tools may present, but is not always implemented. The subjective way of trading, based on greed and fear, may turn out a costly experience.TradingAdvisor has developed a position sizing tool now implemented at our premium customers that shows positive results. This will be described in future articles.

The advantage of spreading risk on several markets together with sound money management is one of TradingAdvisor’s focal points. Trading a mix of markets together with position sizing can reduce risk from general problems arising from an ever-changing energy complex. The convergence of energy and carbon trading, offers new opportunities for risk management. The complex is poised for many more years of robust growth as the markets further globalize. It is a great time to be in the energy business. The downside is that risks are more invasive. Risk and reward are a double-edged sword which means more winners and losers in this highly risky business called energy trading.

In periods correlation may be high in power markets, but now and then various markets/products seem to detach themselves from each other causing a wider difference in prices, resulting in lower correlation. The fact is that energy markets are experiencing constant change and this will also be in future years. The markets change and price volatility is part of the game. However, it is volatility and prices that traders trade. Energy market projections are subject to much uncertainty. Many of the events that shape energy markets are random and cannot be anticipated, severe weather, political disruptions, strikes and technology. Additionally, future developments in technologies, demographics and resources cannot be foreseen with certainty. Causing unforeseen leaps in market prices, the various markets may be hard to explain.

The benefits of diversification are indisputable. A balanced portfolio is an advantage in today’s volatile energy market. The markets may be seen as a whole and a larger perspective is by many considered a necessity. But, nevertheless, the markets seem to move in opposite directions from time to time. As one market experiences huge price fluctuations, another market is trending. The answer to this may be complex, both products being parts of a whole, but correlation seems to be low from time to time.

There is no way to control the environment in which you must make decisions. Imperfect conditions are the normal state of the markets and there are always factors beyond your system’s input that can affect your trades. You must have confidence in your trading system and be committed to its signals, even knowing that your results will occasionally be affected by events beyond your control. If you try to trade only during times of perfect information, then you have effectively decided not to trade at all. TradingAdvisors toolbox enables the trader to protect capital and maximize profit. Almost all areas of trading will seem to be a struggle at some time. When markets are more volatile than you like, you will be struggling against the trading environment. The key is to be aware of the environment and situation you are in and make decisions when the conditions favour your success.

TradingAdvisor’s position sizing tool implemented with strategies on several markets will be further described in future articles during 2010.