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2009 Trading Systems Annual Review

January 25, 2010

 

2009 Trading Systems Review:

2009 was unfortunately no better for most trading systems than it was for managed futures, with day trading systems right on down to trend following models finding it more than a little difficult to make money this past year.  

The reasons for the underperformance are not unlike those for the poor performance in managed futures in 2009, and revolve around volatility in everything from German Dax futures to soybeans retreating from historic highs at the end of 2008 to more normal (although still elevated) levels.

One of the issues for trading systems was that their market of choice, stock index futures, happened to be the poster child for the volatility drop (see chart below). Most trading systems require two market components in order to be viable: Market Liquidity and Volatility.  

The first component, liquidity, remains high as a near record number of traders remain involved in the futures markets with approximately 2.5 million e-mini SP contracts exchanging hands each day.  More and more markets are exhibiting the type of liquidity needed to support short term trading systems as well, thanks to the emergence of electronic trading cross traditionally illiquid markets like Sugar.  Now everything from grains, to energies, to sugar can be traded efficiently ‘on the screen’.

The significant drop-off in the second market component systems need, market volatility, has been well documented – with the VIX (CBOE Volatility Index) falling -46%. But even more troublesome for system traders, the 100 day average daily trading range (ATR) (what we could call the realized volatility) went from a whopping 49pts (or 6.5% of the index value) on average between the previous day’s high/low and next day’s high/low down to just 17 points (or 1.5%), falling by over 65% over the course of ’09. 

2009 % Change in Volatility

Imagine you are trying to make 8.5 points trading an emini S&P 500 program. With the 17 point average true range, you have to capture 50% of each day’s move in order to be correct; while a year ago you only had to capture 17% of each day’s move. The smaller the trading range, the more precise the systems need to be with their trades.   This continuous decrease in volatility and trading range caused most short term traders to struggle throughout much of 2009, just as the expanding volatility benefitted them in 2008.

Meanwhile multi market trend following traders who don’t need stock index volatility or abundant liquidity, found that 2009 was a year of either feast or famine.   For most CTA’s who trade 60+ markets worldwide 2009 was a very though year due to rising correlations across markets that are historically not very correlated and lack of trading off of fundamentals (weak USD).  However, the two multi market systems that we track, Relativity and Aberration, outperformed their CTA counterparts in 2009 - leading us to ponder what the root cause of this was.  How can a single system outperform some of the better traders in the world?  

Unfortunately, we think that this was the potentially a case of the systems being more lucky than good due to their smaller portfolio sizes and lower number of markets traded.   In short the less market exposure a trend following manager had in 2009, the better chance it had at success; especially if the individual market selection was fortuitous.

Without further ado, you will find below a brief review of the 2009 performance for many of the trading systems Attain clients are invested in. The reviews are done alphabetically within the main categories (day trading, swing trading, and trend following) we track.

The following section lists a system by systems report of many of the trading systems tracked by Attain, with a link to that trading system’s hypothetical performance record. We’re here to report the good, the bad, and the ugly, thus you will see systems that did well, and systems that did not.

Please note that all performance data is calculated using a Hypothetical Model Account

 

Important Risk Disclosure

Any % returns in the reviews below are hypothetical in that they represent returns in a model account. The model account rises or falls by the exact single contract profit and loss achieved by clients trading actual money pursuant to the listed system's trading signals on the appropriate dates, or if no actual client profit or loss available - by the hypothetical single contract profit and loss of trades generated by the system's trading signals over the test period. The hypothetical model account begins with the initial capital level listed, and is reset to that amount each month. The % returns reflect inclusion of commissions, fees, and the cost of the system. Commission and fee cost = # of monthly trades * $50.00 ($30 for eminis). The monthly cost of the system is subtracted from the net profit/loss prior to calculating the % return. For systems with one time purchase costs, the monthly cost is calculated by dividing the purchase cost by the number of months in the reporting period.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.

THESE PERFORMANCE TABLES AND RESULTS ARE HYPOTHETICAL IN NATURE AND DO NOT REPRESENT TRADING IN ACTUAL ACCOUNTS.

 

-----------------------------------------Short Term (Day Trading)------------------------------------------

Short term day trading programs are the ones on the volatility front lines, so to speak, and as you would expect they had a difficult year in 2009. Systems that had great 2008 performance (Compass SP, Waugh ERL) found it much harder to succeed in a market environment with decreasing trading ranges and trading opportunities, while systems that are designed to take advantage of bullish market conditions outperformed those that do not have a Long / Short bias.

ATB TrendyBalance DAX: performance / performance / performance

The ATB Trendy Balance family of programs (V1, V2, and V3) completed its first full year of tracking by Attain in 2009.  The ATB Trendy Balance programs are from developer Auto Trading Bot and executed through our partner in Spain, and include the three versions listed working on the DAX (German Stock market) and Euro Stoxx (sort of European DJIA index) futures.  Each has had varying degrees of hypothetical success over the years, but most also have drawdowns in excess of 50%,meaning they certainly are not systems for the risk adverse investor.   However, as a group, the ATB family outperformed most other day trading models in 2009 and had success in very difficult market conditions.  

ATB Trendy Balance V2 DAX was the most actively traded model in 2009 posting a  hypothetical return of +36.58% with a drawdown of -93.22%.   As you probably can imagine it was a pretty wild ride for most of year.  From a risk vs return perspective the V1 and V3 versions did perform better in 2009. However, those models underperformed V2 in 2008.  Since it is almost impossible for us to predict which version of the ATB models will perform best in any given year we recommend that clients who are considering these systems pick one model and stick with it.  Trying to hop from one model to another is tempting, but in reality is almost an impossible strategy to execute. 

Heading into 2010 we expect ATB TrendyBalance to continue to have success, albeit volatile.   The systems have already survived two of the hardest system trading years on record and have proven they are flexible enough to handle extreme market volatility. A good way to play these volatile systems could be to invest while in a large DD, and look to exit on a return to profitability.  All in all, we think any of the ATB systems are a nice fit for a portfolio with a core set of CTAs who are looking for a way to play the volatile market conditions which don’t seem to be going away, and willing to take on some risk in exchange for some higher potential returns. 

 

BetaCon 4/1 ESX: performance

Like many other day trading strategies,  BetaCon 4/1 ESX had a tough 2009, dropping a hypothetical -42.46% on the year with a max drawdown of -45.67%. This was the annual performance for the program, but it remains on many investors’ radars because of its long track record and consistent results over the past three years (- 7 % in 2007, max drawdown of -38.33%, +29 % in 2008, max drawdown of -29.21% and the aforementioned – 42 % in 2009). The second half of the year was the culprit for the majority of the 2009 losses, but the system has started the New Year on the right foot (+3.70 % MTD in January 2010) and is seems poised to dig itself out of drawdown.  Investors who are looking to expand their portfolios and want European market day trading exposure should consider BetaCon 4/1 ESX in 2010.

Bounce ERL / EMD: performance / performance

The day trading versions of Bounce ERL and Bounce EMD were two of the lucky few day trading systems to post positive numbers in 2009.  Bounce ERL led all day trading models with a hypothetical return of +44.44% with a max drawdown of -5.70%, while Bounce EMD was at +19.94% with a -14.40% max drawdown. The system’s long only strategy (looking for market bounces) performed as we would expect it to in one of the largest market bounces in history.  Developed by Mr. Peter Zwag, the Bounce strategy looks to enter long trades after a sharp downturn or extended sell off in the stock market, in expectation of a “bounce” higher. The stock market correction of 2008 provided the perfect setup for a system like Bounce in 2009.  Plus, the decrease in market volatility also helped the strategy as it was less likely to get stopped out of trades.  In 2008 Bounce often had the right idea about a trade but was not able to hold on due to the extreme volatility.  

Bounce has now completed its fifth year of client trading at Attain and we have seen the system perform across a variety of market environments.   History tells us that Bounce is most successful during an upward trending stock market, and with many feeling we’re due for a market correction - our expectations for 2010 are tempered a bit, meaning it is hard for us to see Bounce being at the top of the day trading list again this year.  But, if stocks continue to rally and chase there pre-2008 levels Bounce should continue to have some degree of success.   The system would also benefit from a market correction that would help set the market up for another extended rally.

Clipper ERL: performance

Clipper is the sister system to Mariner Futures' Compass SP day trading system, designed to trade emini Russell 2000 futures.  The system is unique in that it looks exclusively at price and time, and does not rely on any traditional technical indicators. Like Compass, the logic of the system targets a specific pattern in which a trend is established, has a shallow pullback and then the trend is re-established.

Like most other day trading models Clipper is a long volatility model that has its most success during periods of market volatility expansion.   The system also performs better when daily trading ranges are increasing as well. With both volatility and trading ranges decreasing gradually throughout the year, it is not a surprise that 2009 was tough on Clipper at -16.35% ROR and a end of month max drawdown of -23.76%.

Heading into 2010 we expect that Clipper performance will improve with the expansion of market volatility and trading ranges.

Compass SP: performance

The venerable Compass system completed the 9th full year of its long, storied journey at Attain in 2009, unfortunately finishing down -17.89 % for the year after posting record performance in 2008 (+ 140.53 % hypothetical, max drawdown -30.42%). When compared to the larger pool of available day trading systems, Compass was able to weather the storm better than its peers, but the negative performance was still a tough pill to swallow for old and new Mariner Trading investors alike who expected the system to perform at the elevated volatility levels seen coming into the year.

Looking ahead, an increase in volatility (like we’ve seen over the past few days) should bode well for Compass just as it should for trading systems and the futures industry in general.  Compass still has one of the longest actual fill track records of any publicly available trading system that we are aware of, with Attain having records of clients’ buy and sell prices using the system on over 2,000 trades.

We continue to believe Compass should be a staple in every trading system investor’s portfolio, and especially recommend it when you can get in during a drawdown as its experiencing now.

PSI! ERL : performance

PSI ERL is a new day trading system to Attain in 2009, which is a long only strategy that looks to trade on strong upward market trends based on the underlying movements of securities traded at the NYSE.  If the market internals are strong enough, the system will look to enter in line with the upward trend in the mid morning and early afternoon hours.   Despite its long bias,  PSI! finished 2009 in the red at -7.80% with a max drawdown of -32.30%.   These are pretty disappointing numbers for a system that is designed to profit during bullish market conditions, and we’ll need to see more out of PSI in the future to regain some confidence. Perhaps the market was too bullish for PSI!, as the system was trading at a slightly higher clip, on average, than previous years (6 trades per month, compared to 4 trades per month) and causing more losing trades.

We are cautiously optimistic that PSI will improve as market conditions become more normal in 2010.

Rayo Plus DAX: performance

The Rayo Plus Dax system was a tale of two halves in 2009, exciting investors in the first half of the year with steady gains only to give them back in the second half as performance was stymied by the steadily contracting volatility.

As with most day trading systems,  market follow through is needed for Rayo to be successful (with the market closing at or near its high/low for the day). And there were just too many intraday reversals causing losses for Rayo in 2009. The system ended 2009 with hypothetical net performance of -31.13% and a max drawdown of -40.06%.  Most of the system struggles can be attributed a lack of follow through in the DAX, which saw large overnight gaps in one direction turn completely the other way during the US session as US news and data moved both markets.

Upper Hand ES: performance

Upper Hand ES was another new day trading model at Attain in 2009 looking to benefit from the increase in volatility seen in 2007 and 2008.  Upper Hand comes to us from Jeff Pilsmaker of Boston, MA and it is first foray in the public system sector, and is one of the rare systems that has a short bias. It prefers to trade when the market is moving lower due to the developers belief that markets tend to fall twice as fast as they rise.

The system will take long trades as well, but those typically account for only about 30% of all system trades.  As for performance, 2009 was a tough year to have a short bias, and Upper Hand’s performance reflects that.  Upper Hand held its own throughout the first half of the year posting moderate gains but was eventually overcome by the bulls and posted a hypothetical loss of -20.40% with a drawdown of -26.45%.

Waugh ERL: performance

Waugh ERL was one of the darlings in 2008 , especially in the 4th quarter of the year when volatility when measured by the VIX index hit historically high levels of 80+.  However, 2009 was a very different story as market volatility decreased approximately 75% from its 2008 highs. One unique feature of the Waugh system is that it enters a trade only in afternoon after the market has clearly (what Waugh believes is clearly) shown its trend for the day.  This means that the system needs a continuation of the market move into the market close to do well.  In other words the system needs the mini Russell market to close near or at its highs for long trades, and on its lows for short trades in order to be successful.   Often times Waugh found itself entering the market near the top of trend with little to no continuation for the remainder of the afternoon.  This resulted in a higher than normal percentage of losing trades for the system and a very tough year performance wise.  For the year Waugh ERL hypothetically lost -73.85% with an end of month max drawdown of -81.80%. 

 

-----------------------------------------Medium Term (Swing Trading)---------------------------------------

Taken as a whole, Swing trading systems ended 2009 as the best performing system class at Attain, with many models even outperforming their 2008 returns. These medium term systems benefited from consistent short term trends (mainly up, up, and away) in the stock market as well as the decrease in volatility and trading ranges which kept their wider stops from getting hit prematurely.

AG Mechwarrior ES: performance

AG Mechwarrior sure had a tough act to follow after returning a hypothetical +170 % with a max drawdown of -43.67% in 2008, and 2009 definitely threw the program some curveballs that led to hypothetical losses of -18 % and max drawdown of -38.40% for the year. AG Mechwarrior will perform more like a day trading system than a swing trader most of the time, and the intraday reversals which plagued day traders also hurt AG Mech’s returns.

Despite this year’s losses, AG Mechwarrior continues to gain a lot of interest because of its day+swing profile. Instead of a swing system, it could be described as a day trading system that looks to get a little bit more instead of just exiting at the end of the day. In reality, it is a short term swing system that will usually hold positions overnight and then exit on the first sign of a profitable exit point. Of all the swing systems, AG Mechwarrior continues to be one of the more consistent programs due to its relatively low downside and large upside potential (as shown in 2008).

BAM 90 ES / BAM 90 Single Contract ES: performance / performance

BAM 90 was in the upper echelon of all trading systems in 2009 with returns of +82.25 % hypothetically, max drawdown of -22.30%. New to the Attain platform in August of this year, BAM 90 is unlike any other system we have actively traded over the years. Like most of the swing programs available at Attain, BAM looks to enter in line with the main trend in the e-mini S&P market, but unlike most other systems it waits for a counter-trend move to trigger its entry points, buying at a discount for lack of a better term. It would be the equivalent of wanting to own a stock, but not being crazy about its current price, instead putting a limit order so you can get into its uptrend at a little better price. The other unique aspect of the system is that it can and will enter into multiple contracts, either on a single entry or scaled in entries (buying one at one price, adding another if trade goes against by xx%, etc…)

While clients were only actively trading from August on, the first two quarters of the year were by far the most profitable for the program, but the third and fourth quarters were still strong enough to reward investors for taking a risk on a newer program. The downside of the program is its relatively high (for trading systems) minimum account size of $60K, which it needs to take on the additional risk of entering into multiple contacts.  This adding of contracts can magnify margins and losses, with the goal of leveraging that risk into magnified returns.  

For investors who are interested in the BAM strategy but aren’t quite ready to allocate $60k, the developer has rolled out the BAM 90 Single Contract ES which was released to investors in December 2009.  BAM 90 Single Contract ES trades the exact same entry signals as the multi-contract version but will not add to positions and will take a max of 1 ES contract per trade. In comparison, the original version will trade 2 ES contracts per signal and can have up to 6 ES contracts open at one time.

Bounce Swing ERL / EMD: performance / performance

Much like its day trading counterpart Bounce Swing had a good year riding the stock market “bounce” in 2009.  Bounce Swing uses the same exact entry strategy as the day trading model; the only difference being that Bounce Swing will hold trades overnight and look for a continuation in the market move before exiting the next day.  This strategy worked out well in ’09 as Bounce outperformed in the ERL at +53.24% hypothetically with a 5.40% end of month drawdown.  The EMD also posted positive hypothetical numbers at +14.74% but was much more volatile with a 37.30% drawdown.

Polaris ES / ERL / YM: performance / performance / performance

Polaris is a unique swing trading model in that it uses seasonal trends to enter and exit trades.   In other words the system looks for predetermined buy and sell points based on years of stock market history.  Seasonal trading is one of the original forms of system trading and its success depends heavily on the markets behaving similar to the way they have in the past.   With this in mind, it is not surprising that Polaris had a rough year in a 2009 which was anything but normal.  

Stock markets traded outside of normal parameters for much of the year, and did not trade with much seasonal bias at all.  For example, the famed Santa Claus rally did not occur in 2009 as stocks traded in a tight range from mid – November until the end of the year.   Hypothetically Polaris ES closed out the year at -14.89% with a -44.22% max drawdown, Polaris ERL +2.85% with a -57.95% max drawdown, and Polaris YM -13.37% with a -40.42% max drawdown.

Strategic SP / ES: performance / performance

Strategic SP and Strategic ES both had profitable years in 2009, with the full size SP program handily outperforming the emini version.  These systems come to us from the same developer of the AG Mechwarrior system - Strategic Capital Management of New Zealand -  and are now in their 15th month of client trading at Attain. 

The Strategic systems have classic swing trading entry techniques with modified exit points.  The system is a contrarian trader that will look for short term bottoms (long trades) and tops (short trades) in the market.  Inside of the Strategic model are eight subsystems that are analyzing overnight gaps, continuation patterns, range expansions, seasonality, overbought / oversold, reversals, and volatility entries.  Each of these subsystems are used to indentify high probability market entries.  However any seasoned trader will tell you that entries are only half the battle and unlike traditional swing trading systems which stay in the market 100% of the time, Strategic will exit a trade and go completely flat before entering a new trade.   This strategy allows the system to catch its breath and helps prevent it from getting whipsawed in choppy market conditions such as those present in 2009.

Overall the Strategic program had a successful year in 2009.  Strategic SP was up +38.61% hypothetically for the year with a -29.90% max drawdown. The ES did not have quite as a good of a year as the SP but I it was in the black hypothetically at +6.23% and a drawdown of 38.25%. This discrepancy between the SP and ES left some clients scratching their heads (how can they be so different?), and it is important to note that the ES saw different results because it trades on its own data stream, the emini S&P 500 futures, versus trading the emini but based off the signals of the full S&P 500 futures. With more retail traders, the emini data stream is considered a little “noisier”, and that extra tick higher here and slightly different low there conspired to make Strategic ES underperform.  Over time, the difference between the two should not be as severe.

Tzar ES / ERL / EMD: performance / performance / performance

While no longer offered to new investors, Attain has clients who continue to trade the system. Tzar is the “ol’ standby” of the swing trading universe that often has a knack for performing well when other strategies struggle, and conversely struggle when other systems are doing exceedingly well.  The reason is that it is a counter-trend model which is usually getting in while others are getting out.

 2009 was good year for this strategy.  Tzar ES posted hypothetical returns of +36.88% with a max drawdown of -18.39%, Tzar ERL +5.17% with a drawdown of -21.77%, and Tzar EMD at +22.60% with a drawdown of -11.42%. This system has been closed to new investors for a couple years now but we still think it is worth mentioning so investors can see a lengthy post release track record.

 

-John Cummings         

IMPORTANT RISK DISCLOSURE


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IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.

Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.

Please read carefully the CFTC required disclaimer regarding hypothetical results below.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.