Michael Paulenoff has been a student of and a participant in the world financial markets for the past 26 years, since his graduation from the Georgetown University School of Foreign Service in 1979. Early in his career he analyzed the fundamental and technical aspects of the financial and commodity futures markets for Smith Barney, Harris Upham, and for Drexel, Burnham, and Lambert. From 1988 to 1993 he was President of MJ Capital Inc., a market analysis and trading firm, which advised clients involved in the financial futures and commodity markets. In 1992-93, he co-authored The Business-One Irwin Guide to the Futures Markets (with Stanley Kroll).

Republic National Bank recruited Michael in January 1994, for the position of strategic trader, and market analyst on the bank''s trading floor, which included analysis and trading of instruments in foreign exchange, emerging markets, stock indices, and precious metals. In February 1999, Michael founded MJP Market Strategies, Inc., a financial market advisory firm, and developed www.mjpstrategies.com in October 1999. Mike has been a contributing analyst to Harry Boxer''s "The Technical Trader" since June 2002, and in February 2003 launched MPTrader.com.

I really enjoyed my recent talk with Mike about how he manages his trading business. This is the second part of that interview.

Optionetics: What are some of the key rules or factors that your trading systems evaluate before selecting any potential trading opportunity?

Mike: The key for me is whether or not the technical “set-up” has the right look and underlying factors to project a meaningful move in the expected direction. The “set-up” reflects mostly pattern recognition and momentum oscillator techniques that I have developed over the years, and which my work argues provides a high degree of success with reasonably low identifiable risk.

Optionetics: What are your favorite markets that you like to trade and track with your analysis tools?

Mike:  I analyze the major equity market ETFs, such as SPY, QQQQ, DIA, as well as their UltraShort counterparts, SDS, QID, DXD. In addition, I track a host of other sector ETFs: SMH, HHH, PPH, BBH, XLV, XHB, GDX, XLF, IYR, IYT, TLT, and emerging market ETFs such as EWZ and EEM, and commodity-based ETFs, GLD, SLV.

Optionetics: What is your most memorable trade?

Mike: My most memorable trades have been losses, which taught me valuable lessons about the importance of solid and very disciplined money management techniques, as well as the impact of event risk. Two trades come to mind. The first was in 1988:  With copper prices rocketing from $0.90/lb. to $1.70/lb, my colleague and I decided to short copper into what we thought was an approaching price peak and forthcoming economic slowdown. Instead of just shorting the 1^st or 2^nd month futures contract, putting in a stop 3-5% above the market, we decided to short one of the nearby contracts against purchasing one of the deferred contracts 9 months hence. The idea here was that it would be “safer” to be spread, because if the nearby contract went against us (up), the deferred contract would provide somewhat of a hedge until the position went in our direction with power. Wrong! We entered the short spread position too early prior to the actual peak in copper prices, and every day it seemed, the front month went up, but the deferred contract went up less.

So every day the spread widened, and we lost a little bit, like $0.10-$0.30 per futures spread. The fact that each day’s unrealized loss was small lulled us into a false sense of complacency about an eventual overall positive result on the trade. After a month, the spread widened against us by over 3 cents ($750 per spread) and we had 50 spreads placed. Ouch, a loss of $37,000 before we bailed. The nearby contract had climbed from $1.35 to $1.85, with the deferred climbing each day by slightly less. Had we just shorted nearby copper, we would have been stopped out within a few cents, washed our hands of a bad trade, and have moved on. But, we decided that a spread was the way to stay in the trade longer, which weighed on us every day, and jaded just about everything else we were trying to do. As young trader-analysts we learned a lot (and lost a bundle) from that experience. To this day, my colleague and I tell each other that if our education about money management “only” cost us $37,000, then we got away pretty cheap! 

Memorable trade #2: During the first half of 1990, my colleague and I became extremely bearish on the U.S. Dollar versus the Japanese Yen, and as a result we accumulated a large long position in Japanese futures contracts on almost every pullback during a 4-5 month period . We trailed the position with a 4% stop all day and during the overnight session. By the end of July 1990, the position was profitable by around $400,000, and we were trailing our stop now at progressively higher key Yen support levels that would “ensure” that we would not lose any more than our profit on the trade- and that we thought would be inconceivable. We figured if the trend began to change, first the pattern would become toppy, and we would be able to get out with 70%-80% of our profit in that case. Just before midnight Eastern U.S. time, on August 1^st, 1990, Saddam Hussein attacked Kuwait, which triggered a massive flight-to-quality trade into the dollar, and a powerful panic sell-off in Yen, Dmark, Swiss Franc etc. During the next several hours, the dollar climbed meteorically, in some cases by 5%, and the unthinkable happened. I received a “wake-up call” from my overnight futures desk at around 4 AM, informing me that I had been stopped out of my entire long yen position at a price that effectively eliminated the $400,000 profit and months of disciplined, well thought-out trade planning. Ouch!  Welcome to “event risk,” Michael Paulenoff. The unthinkable can and sometimes does happen!

Optionetics: With all the different technical as well as fundamental analysis tools out there how does a new trader avoid information overload or "analysis paralysis"?

Mike: There is no substitute for mentoring. Young people coming out of college who want to get into trading should pursue positions in firms that have trading desks, and or training programs. The best training is to watch experienced traders and portfolio managers navigate the markets. For newcomers to the world of investing, trading and analysis, in general, the “newbie” trader must read, read, and read more about markets and about trading psychology from the classic books available in a well stocked trading library. All the while the student of all of this information and of the various fundamental and technical disciplines must develop a sense of what type of analysis suits his or her personality.

Optionetics: Thanks, Mike, for speaking about your trading approach with our Optionetics reading audience.

To read previous installments of this interview, please click here.


Jeff Neal 
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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