Reflections on Risk, Conviction, and the Road to 2025
“Yesterday’s home runs don’t win today’s games.” – Babe Ruth
What are the big setups heading into 2025?
I always say, you never know where your biggest winners will come from and I believe that to be true. But holding on to big winners requires having a view. That view can be based on quantitative analysis, fundamentals, historical trends, or technical indicators
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The key is conviction in that view, paired with the humility to know you could be wrong. (This could be as simple as having faith in your trailing stop through backtesting.)
This year, I had great returns (check the portfolio reviews and I will go over our year end returns next week), but I didn’t get everything right. I never will.
The difference is, I’ve learned (often the hard way) to approach every trade with the understanding that it could go against me. That mindset has been invaluable.
This is what separates those who write about markets from those of us who trade.
It’s like being in early 2020, during the start of the crash, and having the conviction to say the market would recover by year end.
As a writer, you could say that and you could be right.
Traders need the ability to get out and say I was wrong.
As a swing trader using leverage, holding through a significant drawdown could wipe you out. Win rates fluctuate, but that doesn’t mean you can’t outperform buy-and-hold investors over time.
The key is understanding how to manage risk and adapt. Learn more here…
Most of the time, a high win rate actually leads to lower profits.
The key takeaway? Don’t be afraid to take a loss and move on to the next trade.
So, what’s in store for 2025?
The honest answer is, I don’t know. But I do believe there are some setups worth keeping a close eye on…
The squeeze on crude supply from Iran and Russia has driven a rally in Middle Eastern oil prices, with some grades now trading at rarely seen premiums over Brent.
Key highlights:
Murban, Oman, and Dubai surge: UAE’s Murban crude futures outperformed Brent over the last two months, while Oman and Dubai grades flipped to a rare premium, fueled by robust demand from China and India amid reduced Russian and Iranian shipments.
U.S. sanctions bite: Washington’s crackdown on Iran’s “Ghost Fleet” of tankers has pushed Iranian oil into floating storage off Southeast Asia, as buyers tread carefully. New sanctions also target companies across Suriname, India, Malaysia, and China linked to illicit Iranian oil trade.
Russia under pressure: Moscow’s exports by sea are shrinking as it faces tighter OPEC+ quotas and increased sanctions scrutiny, further crimping global supply.
Meanwhile, Saudi Arabia is reclaiming market share in Asia, stepping in to fill the gap left by falling Russian exports to the region. The Kingdom’s rising shipments highlight a shifting oil trade landscape in response to these disruptions.
Positioning will be a key driver, as CTAs continue to receive buy signals for oil, which could significantly boost prices. Next stop: $85.
(For subscribers) Your stop for the reversal model signal should now be in profit with your trailing stop.
Commodities will also rely on the dollar easing some of the pressure it’s been exerting on the market.
The commercials (red line on the legacy index) are net long the Euro with declining open interest, often a signal for potential reversals.
This matters for the dollar because the Dollar Index is heavily weighted toward the Euro:
Euro (EUR): 57.6%
Japanese Yen (JPY): 13.6%
Pound Sterling (GBP): 11.9%
If the dollar cools off, it could provide a boost to small caps and potentially reduce the market’s reliance on a handful of mega-cap stocks. (AAO remains long the Nasdaq and the semiconductor sector.)
A weaker dollar often gives small cap stocks a boost, thanks to their heavy focus on domestic markets. Unlike multinational giants, small caps are less exposed to the currency-driven headwinds of overseas earnings.
At the same time, a declining dollar can signal a risk on environment, drawing investors toward the growth potential of smaller companies. In some cases, it also improves export competitiveness for select small caps and bolsters revenues for those tied to rising commodity prices.
The result? A favorable setup for small caps to shine when the dollar stumbles.
Either way, the immediate setup right in front of us is the semiconductor sector.
I wrote about this trade, noting that we should buy once SMH breaks out of its tight range. However, when buying options, I prefer to be a little early. These are still actionable for subscribers here…
Next week, AAO will return to its regularly scheduled program. (All these back to back holidays are kind of driving me crazy lol) I’ll cover year end returns, risk models, systems, strategies, and more. I had a great time with all of you on yesterday’s conference call, and AAO will continue hosting those moving forward.
If you would like to see all of our content, this is the last week of our last sale before AAO raises our prices.
https://aaoresearch.substack.com/TheLastSale
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