Here are the 10 basic steps of my system. This takes me about 10 minutes to do each week. And if I've got any trades to put on, perhaps another 10 or 15 minutes.
1) Download latest Commitments of Traders data after the report is released each Friday at 3:30 p.m. (EST). (Follow these instructions, courtesy of the CFTC.)
2) Cut and paste it into my spreadsheet for each market.
3) Calculate the latest numbers for the groups of traders I am watching for each market - i.e., their net position as a percent of the total open interest and their total open interest (long plus short positions). I get a new signal when the positioning crosses a signal line, as shown on my latest signals table. If I already have a trade on, it is only a new signal if the positioning crosses the signal line for a trade in the opposite direction. For example, if I am long gold, it is only a new signal when the signal line is crossed that calls for going short.
4) If I get a new signal in a market, I look up the "trade delay" and figure out when to take the trade. The trade delay varies for each setup and is the number of weeks that was historically most profitable to wait before executing the trade. I believe the delays work because it can take time for extreme trader positioning to impact underlying markets or for that positioning to start unwinding and reverse course, which can change market trends. (To see the delay periods, got to my "Latest Signals & Results" page, click the link for the main table, and see the "Trade Delay" column. Trades always take place on the weekly open of trading.)
5) Risk-Control Rules
Some traders believe controlling risk is more important than their actual strategy for timing trades. Here are the risk-management rules I use.
(A) Diversification Rule. I won't allocate more than 25 percent of my total assets in one direction (i.e., long or short) to any one group of highly correlated markets (for example, gold, silver, copper, platinum, crude oil and heating oil). See the table on my Latest Signals & Backtesting Results page (scroll down) for a list of highly correlated markets.
(B) Black Swan Rule. How to deal with historically unprecedented market events has bedeviled traders. Such events are sometimes called "statistical fat tails" or "Black Swans" - anomalous markets that defy regular statistics and can blow up a trader. In the case of my system, they can lead a setup to get stopped out because it experienced a loss larger than anything seen in the past data. Add up a few major losses or trades that get stopped out, and my account gets depleted in any unacceptable way. My Black Swan Rule is designed to control this kind of risk. It has two parts. One applies to individual trading setups, the other to the overall trading system.
(i) I will cease trading any individual trading setup for four weeks that was stopped out because of a loss greater than the setup's past maximum drawdown. Four weeks is hopefully enough time to let markets settle down and allow the data come back into usual alignment.
(ii) In any four-week period, if my portfolio experiences a loss greater than six percent (calculated using the weekly close values), I will close all losing trades on the following weekly open and close winning trades if they experience a drawdown of greater than two percent. I will also cease trading new signals for four weeks.
[Scroll down for the last five rules...]