From Lemons To Lemonade: A Critique From An Anonymous And Loyal PAM Subscriber (9-24-29)

Summary

• Trading is easy when everything goes right. However, nothing goes right all the time; your trading conduct when something goes wrong is what determines your ability to recover swiftly.
• When it comes to working out of a difficult trade to end on high ground, Robert Balan and PAM can be viewed as nothing shy of “poetry in motion”.
• Below, I made a meager attempt to provide some narrative about how RPB took a bag of lemons and turned them into delicious lemonade in less than two short weeks.
• My efforts are completely unsolicited, and 100 percent product of gratitude for having undergone the experience and the knowledge transfer which followed those events.
• My point is that I, and everyone in the community, will certainly undergo a similar situation at some point in our career, outside of PAM. It is an example which, speaking for myself, will serve as template to craft a recovery process, which I hope will be as stellar as PAM's.

Not long ago I made some comments regarding position sizing on a relative basis to that of PAM. Tracking along with Robert Balan’s trades, and there enormous success can provide one a false sense of security such that they expose capital at a much higher relative level to that of PAM, and by doing so when a workout scenario does occur, it can dramatically disable your ability to recover in the same fashion as PAM.

Recently, exactly such a trade occurred, where had one been following PAM with an elevated exposure size relative to that of PAM, they would have experienced a severe drawdown. This has significant implications for a host of reasons:

1. A substantial reduction in overall capital disables your ability to track along with Robert’s keen recovery approach.

2. When you are participating in his recovery approach, you’re now doing so with less exposure size due to the drawdown you experienced such that when he recovers completely, you recover partially.

3. It’s totally unnecessary to increase exposure size to substantially greater than PAM. After all, look at PAM’s performance throughout this year, then read and re-read his article on compounding of capital. This approach to capital management enables one to compound capital minimally on a quarterly basis, and depending on your initial base of capital, as often as monthly.

As a relatively new subscriber to PAM, I was very interested in observing firsthand how Robert Balan handled a scenario that failed to play out in the same picture perfect fashion as most of his trades, and I fear my meager remarks herein will not do justice to how impressed I was when it finally occurred.

In fact, making a few comments like I’m doing here seems to be about the only way I know to express my gratitude. In any business things don’t always go exactly as planned, and issues along the way always arise. Trading is no different, but observing and trading with Robert these last few weeks shows firsthand how masterfully crafty he is at his work.

So, allow me to provide a few observations. Note the spreadsheet below that shows all the equity index futures trades conducted by PAM beginning the week the difficulty began. On September 10th, PAM longed 864 NQZ0 contracts, and shortly thereafter the equity markets turned down, resulting in what I calculated to be an approximate 13% drawdown.

Please don’t hold me to these numbers, as they are broad approximations. So, firstly, one question you need to consider is that if you took these trades, what was your personal drawdown? If it was significantly over 13%, then you might consider how you felt with the drawdown, and did it fall into a level of comfort you can handle relating to your own risk tolerance, and ability to track along with PAM to recover swiftly.

Shortly after the long NQ trade occurred, a rebound commenced such that PAM recovered ~40-45% of the NQ long position drawdown. Prior to this bounce, Robert made comments in the room relating to how once the initial move down completes, there would be at least a minimal retrace of 50% of the drop that had occurred, which as we now know is indeed what occurred.

It was at the approximate 50% retrace level that PAM shorted the front month contract in NQ. This approach promptly reduced the drawdown and locked in the bounce in account value by taking a hedging position in the front month NQ contract that was expiring late the following week.

Then, starting the following week, PAM initiated a series of scalping trades using NQU0, YM, RTY and ES, where these scalping trades continued right into today, and still continue, accumulating scalping profits that more than made up the NQ drawdown.

It has promptly put PAM and their subscribers into not just a profit situation, but a nice profit situation, going from being down 13% to now being up almost 6%, all in less than 2 short weeks. You can trade your entire life and not see something so impressive as how Robert handled this recovery.

Another interesting observation is how he converted from the front month NQU0 contract as the hedge, over to the ESZ0 contract. Initially, the notional value of the ES hedge did not adequately hedge the NQ long, because as we all know the notional value of one ES contract is less than that of NQ.

So, to make adjustment for this, he took additional short scalping trades in ES, RTY, YM, and even NQ, such that his overall notional value exposure was consistently to the short side. I did notice that at any given time during this period, PAM never had a notional value to overall capital ratio of greater than 4, and virtually always remained in the max 3-3.5 range.

Said differently, if you were managing $1M, and were matching PAM’s exposure size, you would never have had more than $3M - $3.5M of overall short equity exposure, collectively with all your positons, both long and short combined. This is right sized risk management at its finest. Ultimately he locked in profits on the hedging position in excess of $4M.

Lastly, and perhaps the most important observation of all is how I observed Robert staying true to his overall conviction and analysis. Comments relating to high risk trade dates, expectations for rate movements, liquidity impacts, seasonality, etc.

Reading his comments and thinking about it academically is one thing, but it is an entirely different proposition to take meaningful trade exposure, and then continue to hold that exposure until this analysis funnels its way into equity levels, and thus the net liquidation of our trading accounts. That conviction comes from long experience, and I’m glad to have that experience on my side now as a trader.

Below is a chronicle of trades I logged in real time that PAM did over the last few weeks, and that shows the deliberate and incremental management out of what was a difficult situation that ended up firmly on high ground.

My single favorite quip by Mr. Balan over the last several weeks was this:

“Here is the absolute truth -- spewing out theory is fun (and easy) -- you may even look like a genius. The real measure is when you have money at stake, the theory is still far from an end-game, and the market is squeezing your nuts. What do you do? That is why those spewing out Elliott Wave schemata with a zillion alternative wave counts, with no money at stake ought to be shot. They have no frigging skin in the game, and to them everything is theoretical. Try trading actual money with several alternate scenarios. I would like them to try.”

Nothing could be truer! I hope you glean a little something from these comments, and I wish successful trading to you all.

Green rows represent open positions at the time of this writing.