Reflections at the the end of another year in trading...
For me, 2009 was a transitional year for trading. From mid-2007, through the early months of 2009, we saw periods of extreme volatility (peaking in Oct/Nov 2008). This made for an awesome trading environment and unprecedented numbers of trading opportunities and income potential. Virtually all of my trading acquaintances booked a record year in 2008, and most of them had individual months that exceeded their prior record annual returns.
As the first quarter of 2009 came to a conclusion, the nation entered into a fever of bailouts, which dampened volatility and reduced the opportunities for most traders. As the year progressed, volatility continued to decline, and most traders tended to find their trading increasingly difficult.
Summer brought the bad news of the proposed legislation for a financial 'transaction tax' of 0.25% on all transactions. This would effectively end trading as an occupation for most traders. (Personally, the value of my transactions in 2008 were $22B and another $8B this year - the transaction tax would certainly wipe out my viability in this market) While many traders would happily retire from their incomes over the past several years, it would be very unfortunate for the rest if the transaction tax forces them into new occupations. Currently, I think it's too early to draw a conclusion on it's passage, and I believe the odds are still against it.
Regardless of the end result of the transaction tax, traders will need to adjust to the current lower volatility environment. Trading strategies that reaped huge rewards with higher volatility levels can often be chronic money pits during periods of low volatility. A trader is usually wise to cut back on position size, or suspend trading altogether if their trading slips into a struggling period (personally, I shut down trading over a week ago, and will continue to suspend trading until at least after the end of the holidays - a period of particularly low volatility - opposite of what my systems prefer).
It's likely that the lower volatility markets are here to stay for the longer term. Many traders will need to develop new strategies that are more in tune with these new market realities.
Brokerage firms are particularly susceptible during these times of extended reduced volumes - I'd hate to own a small trading shop these days. As a trader, at least my overheads are relatively low, while a brokerage firms has large fixed costs.
Looking into 2010, I see a couple of possibilities. The markets could continue to grind away on low volatility, and roughly at the same market price level. The economy is the big wild card for 2010. Will the economy pick up in the face of massive government spending and bailouts? Or, will the economy turn into a second dip of recession, as long term interest rates increase due to the huge level of required debt borrowing, as well as feared inflation?
Long term interest rates are already at the largest spread (above short term rates) in history. If long term rates continue to rise, mortgage rates will rise in tandem and this will bring further pressure down on the housing market, leading to more defaults and bankruptcies.
If a second dip of recession is in our future, then at least traders will have a silver lining of increased market volatility and a better overall trading environment. We'll have to wait to see how 2010 turns out.
I hope everyone had a successful trading year in 2009. For me, it was my #2 best year ever (second only to 2008). That said, my trading has been substantially below average every month since June due to the declining volatility (and I expect my personal trading to continue to be weak until volatility eventually strengthens).
I wish everyone the best of health and trading success in 2010. |
