I’m always trying to find some different way to look at the chart. I found this and not sure if it worth sharing, but here it is. For the month of March each year… Weekly candle heights compared, from low to high and open to close. I don’t have a lot to say, as far as analysis goes, just that the market appears to be tightening the last two years. I would argue right now that the market is waiting for a fundamental reason to move harder. I built the study used at Tradingview.com; I will share them so everyone can play. As always, I’ll share the code as it is not worth keeping a secret.
- Here is the Google Sheets document used for this article
- To find your way back to my other posts about this series, go to my Notes page.
This part should go fairly quick and I should not talk in circles this time. I’m going to refer back to the same timeline I’ve been using, Dec 21, 2017 to Jan 3, 2020. I want to cover every detail that I can. For one thing, I still don’t know myself how all this will unfold completely. I have theories in my head that need to be tested.
For this part I will layer into the position vs just taking on a full short position.
We know Dec 21 was a significant bottom for UGAZ because we can see on the chart. If I just started with the idea of shorting UGAZ on that day, in 2017, would I or should I have taken a max short position of 18% of my account value all at once? Fundamentals have the answer. I’d like to compare that moment, in 2017, to right now.
After a long run down , and the price is closer to a bottom than a top, should I short UGAZ with 18% of the funds in my account? The answer to this is going to be far different for everyone. I could max out at 18% and just chance it. I could go long with something else to protect it, which I’ll get to next. For now I want to stick with “Layering-in”. I want to compare a simple plan for layering into a position with the Short-and-Hold example.
As for my answer; I would not, in any way take on a UGAZ short right now with 18% of my funds without a spike in the price. Fundamentally, a small short here is worthy of attention, but not 18%. Not yet. On to the data.
In the chart below, I’m zooming in to the beginning of the range I’ve been discussing. Early on there is a substantial move upward in UGAZ. I want to use this to show how much difference layering into the position can make. So just off the top of my head I chose to plot these lines roughly every 10% move higher. I started Dec 21st with 2 shares, and added 2 shares with each close that was roughly 10% higher than the previous. There is a gap from $600/share to $700/share, so I added a couple of layers close together there.
I changed a few layers just to see how the chart would turn out, mostly sticking to the UGAZ layers above. I want to point out here the maximum Funds needed to cover the UGAZ short is around $10,000 less than originally. Also the pre-interest gain made on Jan 3, 2020 is $10786, with a maximum of 16 shares shorted. I only layered into the first move backward to show how much difference the results can be with a fairly small change in how UGAZ is shorted.
Above is a screenshot of the data sheet of my spreadsheet. You can make a copy or download the spreadsheet and manipulate the sheet if you like. The highlighted column is the “number of shares” you want to be holding at that time. You can increase or decrease (with a positive number, the sheet assumes this is a short position), the sheet will adjust the average of shares held with each increased short, and will hold onto any gain/loss when the position is reduced. I’m just getting warmed up with my analysis of this. Look forward to more in the following posts.
To read my other posts on this series, go to my Notes page.
- Two links to support this article:
Now that I’ve said too much about the dangers of shorting UGAZ, let us move on to how I plan to protect my account. I talk in circles a lot, get over it; I’m thorough. There are two major dangers to protect against, getting a margin call (not having enough funds to hold on to a short position when it goes backward), and the broker taking the shares back because the owner of them must have them back to sell them. These dangers are equally damaging and can both leave you “holding the bag”…. Am I saying that right?
In this post I’m sharing the data for the example I’ve been working on; Holding short from Dec 21, 2017 to Jan 3, 2020. I’ll get to the Margin dangers in the next couple of posts. I swear I have an outline in my head, it just keeps changing.
Something I hadn’t noticed before, this example shows 371 days to go backward, then 371 days to make a profit. As a summary, you needed roughly $53,000 to hold on to a short worth $9944. That is a position worth 18-19% of max pain. After 371 days of survival, the trade goes on to make roughly 86%, or very roughly 13-14% gain on the account after incurring (assumed) interest charges to short for that long a period.
The focus here is: By never exceeding more than 18% of my original account balance on a short position, I could have survived this trade.
First step, plot the UGAZ short. With Tradingview I can load the UGAZ daily chart and export what I have on the screen to a CSV file. I have daily OHLC all ready for me to manipulate and build the first Chart. Yippie.
I found the time to get the first chart generated. And here it is.
The image may be difficult to see. Good thing I am sharing the document itself for you to look at the chart and the data yourself. I have shared it here, at google sheets. It will open in a new window and you don’t need a google account to view the document. It is a downloadable Excel file if you want to make a copy and change it up any way you like.
So there you have it. Starting on Dec 21, 2017, immediately heading into a loss, recovery, near catastrophic loss, and finally the road to success. I will continue to use this example from Dec 21, 2017 to Jan 3, 2020 for the next few examples. This example is the best of historical moves to test protecting my account. I will eventually test other moments in UGAZ history. I hope to get the next section posted tomorrow. It should be fairly simple; I plan to manipulate some of the data for this chart to show how easy it can be for me to improve risk management and maintain or even improve profits at the same time. Till next time
There will be charts and a spreadsheet with some wicked examples when I’m ready. For now, these are just running thoughts I’ll update when I get time. It will remain linked in the Notes Page If you want to check out Part 1, go here.
My mind is still on protection. This whole strategy revolves around risk management, more than the norm. So I keep placing the boxes or arrows all over the chart to theorize where I might start getting in with a short position and where to stop adding short. I’ll just start with the basic principle.
Above I’ve just drawn one of these arrows I’m talking about, and I drew a wavy red line on the screen. This is to visualize a “backward” move; I’m showing it in a simple range first. For those of you who already understand this well, go eat a hot dog or something. If I were to short sell UGAZ at $100/share with $10,000, I would get 100 shares. Then if the price goes to $300/share, that would be a 200% move up. I would need my original amount of money plus 2 times more to keep this position. I would need $30,000 to keep the broker from exiting the position and leaving me with, possibly $0. It sounds simple, but when looking at the chart that shows a 177% move up, from $387/share to $1071.99/share, it’s not as simple. I need a clear way to make sure I have a handle on this. Now for “the big” example.
The bright green arrow with the line at top and bottom is the biggest upward move UGAZ has ever made, 423.39%. Let’s assume I short UGAZ at $497/share, thinking it is going lower. If I spend $10,000 to short at $497/share, that’s 20 shares with some change left over. My cost is 20*497.2=$9944. If I were to just wait for this to turn into a gain, I’ll be waiting over a year, and the price reaches $2602.3 before I see a gain. Remember this is the wildest, to-date, scenario for UGAZ moving against a short position. I would need 20*2602.3=$52,046 to keep the broker from covering all of my shares of UGAZ and leaving me with $0 in my account. Also there is interest charged when shorting UGAZ. So if the interest rate averages to be 5% on an average price held of $700 from Dec 2017, to Nov 2018 or 330 days. This would be 20*$700/share*.05=$700/365*300=$632. I have no idea if this interest rate is accurate, I’m giving the example as something to think about. I’ve seen the interest rate higher, keep that in mind. So now I need almost $53,000 to hang on to a short position I got for $9944, before I’ll make a dime on the trade. The good part; if i continued to hold this trade until 1/3/2020, the price closes at $67.05. 20*(497.2-67.05)=$8603 – potential $1500 in interest = $7103. This is 13.4% in a little over 2 years. Life could be worse. The broker could need those shares back at $2602/share and I would still be left with $0. I’ll get to that part later. 13.4% in 2 years and 13 days isn’t a lot, but is one hell of a starting point.
The key here to remember, there was a 423% move that took over 5 times the amount of money and a little over a year to survive in order to make any money. So this is like one in a million right? Maybe, but let me give one more example.
Above, I’ve shown 2013/2014. I’ll shorten this up; basically a $10,000 short would require roughly $35,600 plus any interest that must be paid for over a year again for a short-and-hold scenario. Another occurrence similar to this one from March 2016 to March 2017; a year long move roughly 200% up before any money can be made.
So it’s important not to take on too much of a short position, obviously. I’m going to continue to use the 2018 scenario, since that is the most drastic. To plan my strategy around this would not be the most conservative, nor the most impressive; it is however, a starting point. There are two things I’ve talked up protecting against.
- Keeping the position covered with enough cash to prevent a margin call
- Taking a long position to protect against the broker taking the shares back
This post ended up being more of the same that I had forgotten I talked about in Part 1. Now I’ll get into how I plan to protect my account from total destruction, while attempting to make a little more than 13% in two years. I will get underway with Part 2. How to Protect.