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Trading Systems: Managing the Ebb & Flow of Futures Markets

|Includes: GLD, IAU, OIL, SPDR S&P 500 Trust ETF (SPY), USO
The past several months have seen sustained trends in the stock market -- as well as several sectors of the futures markets. Since hitting recent lows of around 1050 in August, the S&P 500 (NYSEARCA:SPY) has rallied about 20% to start the new year at recent highs over 1270.  The futures markets -- and in particular, currencies, metals, energy, agriculture, and several softs -- have presented profit opportunities to futures traders. However, after a strong December, early January has seen some sharp reversals in the future markets.
Recent Futures Market Action
Gold (some popular ETFs include IAU or GLD) went from a recent high in the 1420's down to the 1360's -- or a decline of about -4% in just a few days. Crude oil (OIL and USO) also declined about -4%, moving from recent highs near $92 per barrel down to $88 -- before rallying.  The U.S. dollar has rallied from recent lows.  Is this the beginning of a sharp reversal -- and the end of the sustained trends in commodities and currencies? Or just "healthy" technical action that allows the marketplace to digest the entrenched moves?
Back in November, we wrote about the sharp reversal in the futures markets.  At the time, we saw severe reversals even sharper than this week's moves.  Today, November's sharp pullback may seem like a small "bump in the road." However, at the time (back in November), traders had to manage their risk -- and protect profits from potentially severe drops. As most people will confirm, the financial markets are difficult to trade -- filled with emotions, randomness, and unknowns. 
Systematic Trading Methods: Discipline
Financial analysts and money managers typically find systematic trading methods useful because they keep traders disciplined -- and remove undesirable emotions that can be a hindrance to investment performance.  Oftentimes, certain characteristics of human nature are counter to producing positive trading results.  People sometimes buy a "hot stock" -- or sell a financial asset from "fear" -- at the wrong time. 

Systematic trading approaches are developed to capture movements in the financial markets -- whether they be in individual stocks, stock indices, FX/Forex, futures markets, commodities, or options. The trading strategies aim to capture profit opportunities that develop over time -- but must also weather the storms of market volatility, whipsawing market action, and market risk.
Managing the Ebb & Flow of Markets
There is a trade-off between "potential profit opportunities" versus losses -- and a "decline or drawdown" for any trading strategy.  In a nutshell, traders must "surf" the waves of the markets -- and manage their positions and strategies through the inevitable "ebbs and flows" of the markets. 
Is this recent market action just a hiccup -- and will the markets continue their multi-month trends? Or will the markets reverse and cause profits to decrease and/or disappear -- and even create losses?  Only time will tell -- but systematic trading systems can help eliminate the "noise" for investors. 
Trading Strategies, Probability, and Research
Trading the financial markets is a competitive exercise of probabilities, statistics, and risk management. Quantitative trading systems are typically designed to handle market volatility and are hopefully studied in a scientific and robust methodology that will create as much "forward information" as possible. 
There are always risk and return trade-offs, but good research can help traders and investors capture profit opportunities in the financial markets.  We have studied and developed trading methodologies that attempt to capture profits while managing risk. Please check out the results in this FX/Forex trading challenge (top few percent).  
We will apply our trading methodologies and continue to monitor and research the markets. Ongoing research and a systematic, disciplined, approach -- can help put the numbers, and market action, on your side. 
Here's to a great 2011.  Happy New Year!

Disclosure: I am long SPY.

Additional disclosure: Long commodities and managed futures.