Trend Following Futures Is for Days Like These

When you think of futures contracts, what comes to your mind? Is it the 20x leverage, the adrenaline, the margin trading and subsequent margin calls? Rubbish. It’s the hedging.

I talked about futures contracts with a value investor, and he was borderline scolding me for being a reckless gambler. I think that particular value investor has blind spots all over the place so I couldn’t be bothered about his baseless opinion.

I manage a million dollar portfolio of growth stocks and I feel a strong sense of responsibility for protecting it. It’s days like these when my beloved NQ (E-mini NASDAQ 100 Futures) comes to the rescue.

Futures contracts were precisely made for days like these. Airlines use futures contracts to reduce exposure to volatile fuel prices (it’s called fuel hedging). Farmers do the same with commodities futures. You don’t bastardize them by day trading those tiny ticks. You’re just growing white hair from doing that! My goodness.

I posted a few days back and proposed to invest with conviction and to understand the companies you’re buying, otherwise to dump them. Know what you buy, and hold with conviction. I sincerely hope that the post helped some of you clean up your portfolios — just on time for the messy drop these past days.

I’m not throwing any careful due diligence out of the window and fire sale my holdings. I’m hanging in there with you guys, but I’m here with another piece of advice: Learn the art of hedging. I hedged with the NQ on Feb 22 and am only down a fraction of a percent today.

The signal to sell short came from my trend following system which turns out to be pretty darn accurate in spotting major reversals. It’s completely mechanical and takes human emotion out of trading.

Index futures were precisely made for hedging because of their low margin. It would be near impossible to hedge an entire portfolio if you had to come up with an equal amount of cash. That’s why hedging with ETFs (while possible) is highly inefficient.

Once a trend is established, it will remain intact for an extended period of time. If a trend reverses down like on Feb 22, you go short the entire portfolio value. You keep the hedge until the fog clears.

Smaller portfolios, say $20,000 and above, can be hedged with the new Micro E-mini futures. They’re one tenth the size of E-mini futures like the NQ.

Here’s another advantage: futures contracts settle in cash daily which means short positions will pile up fresh cash as the trend goes down. This money is now at your disposal and it becomes your unfair advantage. You can use it to buy into the stocks you believe in at near lows as you remove the hedge.

There is a ton more I want to teach you. For example, I have 8 dirty secrets for you that investment advisors don’t tell you. I bet you’ll be shocked when you read #6. Just provide your email and I send it over to you.

Author Bio

Matt’s career spans over a series of financial institutions. Trend following became a focus topic when he studied Business Administration and wrote his senior thesis on “The Psychology of Financial Markets”. He is portfolio manager of a high-conviction investment vehicle.