Factor $100,000 Tracking Account Overview and FAQ Overview The Factor Service is intentionally not a trade signaling or identification service believing that the endeavor of market speculation requires each trader to find his or her own unique path by enduring trial and error mistakes while at the same time preserving precious trading assets. I have not known a single trader in my 43-plus years of market speculation who has achieved success by riding the coat tails of another trader. Trading success only occurs when a trader takes complete responsibility for EVERY aspect of his or her own journey. The real value of the Factor Service is not to be found in the specific trades I engage, but in larger concepts: Making risk management the #1 priority in market speculation trading Minimizing the negative impact of human emotions Understanding the value of classical charting principles Treating market speculation as a serious business enterprise I am fully aware that the nominal proprietary trading capital employed by Factor LLC is far greater than the trading capital held by most Factor members. The Factor Tracking Account reflects the translation of Factor s proprietary trading program into an account capitalized at only $100,000. The main purpose of the Factor Tracking Account is to provide Factor members with insight into how I would size and manage trades at $100,000 level of capitalization. While I do not specifically announce in real time the trading activities reflected in the Factor Tracking Account, Factor updates and alerts are written with highly suggestive commentary. Factor Members who pay attention to updates and alerts, remain alert to market price movements and are familiar with entry and exit protocol methods frequently discussed should seldom be surprised by trading activity within the Factor Tracking Account. Each issue of the Factor Update discusses the trades held by the Factor Tracking Account and markets actively considered for a new position. The protective stop and profit target levels of each position held as of the close on Fridays are listed on the last page of each Factor update. A complete list of all trades made in the present year for the Factor Tracking Account is issued at the end of each month. The following page details the meaning of each column of the trade report. Factor $100,000 Tracking Account Overview and FAQ Page 1 of 5
1. Market symbol this column contains the symbol of the stock, ETF/ETN, spot forex pair or futures contract traded. Uniformity does not exist from data provider to data provider for futures. Please see the Market Symbol List for futures contracts in the member archive. 2. Market description. 3. Date of trade entry. 4. Long or short trade. 5. Entry price. 6. Size of trade for the $100,000 Factor Tracking Account in number of shares (stocks), number of contracts (futures) or amount of the first currency listed in a spot FX pair. 7. Protective stop loss placed at the time of the trade entry. Note that I use an active and aggressive trade management protocol. This stop might be changed by the end of the first day of the trade. 8. Basis Point risk. This is the initial risk of a trade based on the entry price, the initial protective stop level and the size of the trade. A 100 BP risk = 1% of capital (or $1,000 in the case of the $100,000 Factor Tracking Account). A 70 BP risk trade = $700 for the Factor Tracking Account, or 7/10 th of 1%. Risk must ALWAYS be measured against trading capital, not against the value of the underlying instrument traded or the margin required for the trade. 9. Current stop level as of the end of trading each Friday. 10. The most recent date the protective stop order was modified. 11. The target of the trade. Unless otherwise mentioned, I take profits at target levels. 12 & 13. The weekly and daily chart construction underlying the trade. 14 & 15. The exit date and price of a trade. 16. The net P/L of a trade, including commissions and fees. 17. The capital required to carry a trade. In the case of cryptos and stocks, this figure will equal Column 18. In the case of futures and forex, this is the margin required to carry the trade. 18. The value of the position. I do list an underlying value for interest rate futures. Factor LLC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Model Tracking Account Trade History and Portfolio Constant nominal capitalization: $100,000 Market (See disclaimers and notes below) Entry Pattern Exit Stop Date L/S Price Size Initial stop BP risk Current Stop Date Target Weekly Daily Date Price The first page of each Factor Update lists two figures: Portfolio leverage this is equal to the total value of open trades divided by $100,000. For example, the portfolio leverage would be 2.2X if the total value of open trades equaled $220,000. Capital utilization this is equal to the total capital required to carry the open trades. Date Net Capital to carry trade Value of trade (entry) Factor $100,000 Tracking Account Overview and FAQ Page 2 of 5
Terms referenced by Factor Nominalized account value this is the total amount of capital I have designated for Factor s proprietary trading program. This capital resides in several different accounts (spot forex, U.S. equities, futures, T-Bills, global equities). I measure the risk on every trade against the total nominalized account value. Tranches I may divide a trade into multiple parts, each managed by different targets and/or protective stops. The Factor updates and Trade Excel table reflects multiple tranche positions. NAV net asset value. I maintain a cumulate non-compounded ROR for Factor s proprietary trading as well as for the Factor Tracking Account. This cumulative ROR is based on sequential closed trade outcomes (measured against the nominalized account value) and does not take into consideration unrealized P/Ls. FAQ Q: You have mentioned that in your prop account you calculate trading size based on X number of futures contracts or Y shares of stock per $1M of nominal capital, which might equate to a 1% risk to your stop loss. How do you determine the number contracts or shares? A: When I plan a trade I have a general idea of what my entry price will be and what my initial stop loss will be of course in the process of execution these price levels get tweaked. The calculation of sizing is simply an exercise in math. If I am willing to risk $10,000 per $1M (1% risk) and the differential between my likely entry and initial stop loss per contract is $500, then my sizing will be 20 contracts per $1M ($10,000/$500 = 20). Q: What percentage of your overall trading capital do you allocate to each trade? A: That figure is not even part of the calculus. I know that some stock traders might allocate 10% of their capital to 10 different stocks. Then they put in a 10% price change stop for each of the 10 stocks meaning that they are risking 1% of their capital for each stock. I trade leveraged instruments. Most of my capital sits in T-Bills or in cash at brokerage firms. So, my focus is on the risk per trade, not in how much of my capital I need to carry each trade. I report my capital utilization on page 1 of each Factor update. Q: Could you condense as briefly as possible the approach you take to trading? A: A discretionary technical trader who cannot briefly and clearly articulate his or her trading approach has not carefully thought through his or her trading approach. I can define 90% of what I do in my trading operation with just a few simple bullet points. I trade primarily futures and forex markets Factor $100,000 Tracking Account Overview and FAQ Page 3 of 5
I am a classical chartist (ala Richard W. Schabacker) I trade the breakout of certain classical chart patterns: Horizontal patterns (as opposed to diagonal patterns), Rectangles, Right angled triangles, H&S patterns, Pennants and flags during an ongoing strong trend 10 to 26 weeks in duration is my sweet spot My maximum risk per trade is 1% of entire nominal trading capital my sizing is based on my entry level and my initial protective stop I am very aggressive in advancing stop protection I do not like trades that dig into my pocket I take profits at the target determined by the completed classical chart pattern I look for chart pivot points to advance stop protection on at least half of my position My win rate is less than 50% and this means that my default thinking is that my next trade will be a loss 80%-plus of my profits have come from less than 20% of my total trades Q: Would you have been able to generate the returns you have experienced if you had applied your charting methods just to the stock market? A: Not a chance! While my leverage during most of 2017 and 2018 to date has been rather light (ranging from.5x to 1.5X), in more typical years I ve had extended periods of leverage greater than 3.0X. The performance I have achieved is due to leverage and the fact I have made it a friend not an enemy. Q: When you advance your protective stop on a trade why don t you lower your basis point risk on the tracking sheet to reflect the amended stop? A: The initial BP risk on a trade not only provides me with a reminder of my initial potential loss, but also of asset volatility. This is best demonstrated with an example. Let s assume I am carrying eight trades whose composite initial risk was 500 BPs. Let s then assume I have moved the protective stop on every trade to at least break-even. To report the entire profile as now having zero BP risk is deceptive because if all my positions were to turn against me simultaneously the asset volatility of my account would perform more like a 500-BP portfolio than a zero-bp portfolio. Q: Is there a way to get an alert anytime Peter enters or exits a trade in the Factor Tracking Account? A: No, the Factor is NOT an advisory service and should not be used that way. Peter may mention in Update an entry or exit range he is looking at, but all traders need to develop their own unique approach. Q: Is the Tracking report available via an Excel spreadsheet rather than the PDF? Factor $100,000 Tracking Account Overview and FAQ Page 4 of 5
A: No, there are many tabs of proprietary data that feed into the Excel spreadsheet. Q: What are the differences between the Factor Tracking Account and the Factor Prop Account? A: The differences fall into several major categories. 1. Futures trade has too much risk for the Tracking Account. In some cases a single futures contract trade would carry more risk than I feel comfortable with in the Factor Tracking Account. So, for the Tracking Account I might do one of three things to adjust the risk. a. Trade a mini contract (e.g., Gold, Silver, grains, some stock indexes) b. Hedge a trade (e.g., short a couple of mini grain contracts against a long of the full contract) c. Use a tighter and more arbitrary initial stop level 2. Trade a highly correlated market with less volatility (e.g., T-Notes instead of T-Bonds). 3. Skip a strong breakout and wait for a pattern retest where the risk is less of course this also can mean that the trade is missed. 4. Layering into and out of trades. The size of the Factor prop account allows me to more readily scale into and out of a trade with multiple tranches. 5. Subjecting a partial position to a trend-following model. I will often subject a partial position to a simple moving average system in case there is plenty of steam left in a trend. Q: Do you have an average annual profit goal in mind at the beginning of each year? A: In reality there is no average year. My focus is not on ROR, but rather on other measures: Protect capital Keep the sequential closed-trade NAV line advancing Maintain a rolling (3-year, 1-year and 20-trade) gain-to-pain ratio above 3.0 Make sure I have a solid reason for each and every trade entry and exit consistent with my trading philosophy, guidelines and rules My experience is that the above measures, combined with initial sizing at 60 to 80 BPs, should produce an annual ROR above 40% with two major assumptions. 1. An annual win rate >45% 2. At least 6 to 8 trading themes producing a net gain >300 BPs plb ### Factor $100,000 Tracking Account Overview and FAQ Page 5 of 5