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System Spotlight: Signum eBL & TY

September 24, 2007

 

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The stock market is not the only market which has seen an increase in volatility in 2007. The bond market has seen the volatility there bump up this year as well, behind the mortgage backed security issues which have been well documented. The surprise 50 basis point rate cut in the US last week, and other world banks in a state of flux during the recent credit crunch/liquidity crisis shows that this volatility in bond futures both here and abroad may be here to stay for quite a while.

Trading systems, especially swing and day trading ones, tend to do better in times of increased volatility; and it should be no surprise then that one of the top systems at Attain recently has been a swing trading bond system which operates on US 10 and 30 yr. bonds, as well as the Euro Bund (European equivalent of US 10 yr.).

How can you attempt to capitalize on the increased volatility in the bond market.... this month's System Spotlight may be an answer, as we highlight the swing trading Signum system as operated on the EuroBund and US 10 yr. note.

Who is the Developer?

The Signum system came to Attain via Poland of all places, and was developed by Mr. Ryszard Krug of K-Partners LLC in 2006.

Mr. Krug graduated with a Mathematics degree from the Wroclaw University in Poland. Throughout his career he has used his math expertise while working for various financial institutions. His professional experience includes working with mathematical modeling, structuring and sales of derivatives. He originally became interested in mathematical models such as neural networks while studying at Wroclaw. Later, in 2003, Mr. Krug set up K-Partners LLC with partner Jarek Krol to put some of their trading concepts to the test.

The founding principle behind this partnership was that only mechanical trading systems can generate reliable and repeatable results, free from any influences and the inconsistencies of human emotion and erroneous decision making. They still believe in this philosophy today, and in fact K-Partners trades the Signum system and other mechanical system strategies for their own account.

How Does it Work?

Unlike many mathematicians, Mr. Krug believes that a good trading system should not be too complicated. This simplistic approach is at the base of the Signum system.

Signum is a bond swing trading system designed to capture medium and long term trends. The primary performance goal is consistency of returns across a number of bond markets worldwide. Beyond the EuroBund and T-Note Futures contracts which are currently traded at Attain, the system has also tested well on the 30 Yr US T-Bond Futures, Gilt (British 10 year) and Japanese Govt Bond Futures, all on a walk-forward basis. Mr. Krug specifically designed SIGNUM with the intention of avoiding curve-fit trading scenarios that have plagued so many systems and traders in the past. In the developer’s opinion, the statistic based mathematical models SIGNUM uses to enter and exit trades are less prone to curve fitting than systems based off of pattern type logic.

Unlike most swing systems that are designed to strictly trade 1 contract per signal, SIGNUM employs robust statistical entry and exit rules, position sizing and partial exits that result in multiple contract entries. Typically the system will enter the market with 2 contracts and then scale out the position at different price levels (partial exits) either on a profit target or stop. The system is designed to trade on daily bars (orders are working in the market) and can generate four types of orders at the end of each trading session. Possible system signals include:

  1. Enter a new position on a stop.
  2. Exit part (profit target) of a position at the market open.
  3. Exit the entire position (stop-loss) on stop.
  4. Exit the entire position at the market open if the volatility limit is reached (either with profit or loss)

Overall the system is not very active as it will only trade 15-20 times per year or 1-2 times per month. Like most swing systems SIGNUM will look to exit losing trades quickly while letting winning trades ride. Therefore when the system is “hot” and making money it may hold onto a position for 1-3 months even after taking the initial profit target. However during choppy market conditions the system will trade more often in search of the next big trend. For example in July the system reversed three times in the first week before settling down and holding the Eurobund long from July 10th to September 19th.

Attain Comments

It is always refreshing to see a swing trading strategy that is not specifically designed to trade the e-mini stock indices. While e-mini swing trading systems are seemingly a dime a dozen, successful systems designed to swing trade bond, currency, and commodity markets are much harder to find. Despite its short 3 month real time track record the SIGNUM bond swing trading programs are showing promise in turbulent market conditions. For example, in early July the system correctly recognized that credit yields in both the US and Europe were due for a major correction and the system entered long in both the Bund and 10 year note. Both trades where extremely successful as credit markets crunched around the world.

Beyond the trade entry logic, we are also very happy to see that the developer has also included variable stops and profit targets in his strategy. Too often, systems designed with static stops and targets fail as volatility increases or decreases across a specific market(s). To help combat volatility related issues (and curve fitting) SIGNUM includes parameters that allow stops and targets to adjust to current market conditions. The profit target itself is also refreshing as it allows the trader to take profits off the table on successful trades. From our experience we know it can be very discouraging to an investor when a wildly successful trade turns into a losing trade. This is why the strategy takes two contracts per signal as the developer is looking to capture both the short term and long term time moves in each market.

The biggest red flag for potential SIGNUM investors is the fact that the system is new. New systems are inherently more risky than systems with longer track records. They are a less proven product and have not been exposed to a wide variety of market conditions. On the other hand this strategy was tested right off the bat as credit market volatility surged in July and August, ultimately passing with flying colors. Unfortunately, even with the recent interest rate cuts, the credit markets are still unstable and it will be interesting to see how the system responds to a potential extended period of market volatility.

Despite being the new kid on the block the SIGNUM system is a worthy of review by Attain investors. It has tested well both on a walk-forward and back testing basis on various bond markets around the world while also showing promise in natural gas and e-mini Russell trading in out of market testing. Beyond its recent real time success, the aspect we like best about this strategy is that it is not tied to the stock market. Last month investors around the world were scrambling to find alternatives to help hedge their long stock market exposure. A bond trading system like Signum was a great choice for diversification then and should continue to be a great alternative in the future.

IMPORTANT RISK DISCLOSURE


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Feature | Week In Review: | Chart of the Week

***Overview***

US Stocks rallied higher last week after the Federal Open Market Committee cut interest rates by 50 basis points (0.50%). Most traders were only expecting a 25 basis point cut and where quite surprised when the number came out on Tuesday. SP futures took off after the announcement, climbing 30 points ($7500 per contract) in 1 minute as stock traders definitely liked the news. For the week SP futures were up +2.43%, NASDAQ futures climbed +2.19%, and Dow Jones futures gained +2.61%. Smallcaps were up big as well with Russell 2000 futures gaining +3.52% and SP Midcap 400 futures rallying +1.85% higher.

Although the rate cut was seen as good news for stocks, it didn’t come without a price in the eyes of currency traders. The US Dollar fell to all time lows against the Euro as inflation concerns came into focus again. For the week Euro futures were up +1.40% while the Dollar Index fell -1.23%. Perhaps even more disturbing is that the Canadian Dollar also became more valuable than the US Dollar as Canadian Dollar futures climbed +2.87%. The Aussie Dollar +3.39% and Swiss Franc +1.23% also traded higher.

Another ominous sign that inflation is occurring, is that nearly every commodity market traded higher last week – i.e. everyday goods are becoming more expensive. Grains & Softs led the way as Coffee futures gained +7.44%, Sugar climbed +4.02% higher, Cotton was up +3.88%, Corn climbed +7.88%, Wheat was up +3.31% and Soybeans finished the week up 2.54%. Precious metal prices climbed higher as well with Gold futures gaining +2.94%, Silver jumped +7.20% higher, Copper was up 5.90% for the week, Platinum saw gains of +2.49% and Palladium was up 2.64%. Finally energy prices also climbed higher as crude oil futures finished the week north of $80 per barrel. For the week crude futures were up +4.52%, RBOB Gas futures climbed +3.67%, Heating Oil gained +2.51%, while Natural Gas was up only +0.91%.

 

***Commodity Trading Advisors (CTAs)***

 

The number one topic last week was once again Dighton Capital USA. As mentioned two weeks ago, Dighton is having a banner month, and it added to its gains last week, approaching gains of nearly 50% here in September after being up an estimated 20% last week alone. For those who didn't read our newsletter about investing in Dighton when it is in Drawdowns to try and capture these huge bounces to the upside, click here to give it a look.

Not to be overshadowed by Dighton, both the NDX Abednego and NDX Shadrach programs are breaking out to the upside this month as well. Investors are cheering the Lean Hog markets these days as previously expanded spread positions have been racing back toward profitability. NDX Abednego is ahead aprox 7% for the month and Shadrach is earning aprox 15%.

In other trading, last week marked September S&P option expiration. Following the round of volatility in August, most mangers positions were relatively light. Most put sellers (Zenith, BC Capital, Zephyr, etc) expired all Sep positions out of harms way – the risk of the market this time around was in the Calls of which Zephyr and Diamond Capital were forced to exit throughout the past week.

We will have early estimates for all our recommended CTAs in next Monday's newsletter.

***Day & Swing Trading***

An extended move immediately following the FOMC announcement on Tuesday gave a handful of systems just what they needed to bounce back into the black for the year. Both swing and day trading systems that were long heading into the announcement were rewarded for taking on the additional risk when the major indices closed the session 2- 3 % higher and sent European indices significant higher the following session.

Adaptive Euro was long three contracts in various foreign stock indices heading into Tuesday and made an astonishing +$19,585.66 for the week. The program is now up over 60 % on the year after hitting a new max drawdown earlier in the year. Bounce eRL also had a breakout week after reaching its profit target on Tuesday for a gain of +$1,760. Adaptive US wasn’t positioned as well as its Euro counterpart but still managed to squeeze out +$150 in profits.

On the losing side, Ultramini YM lost -$12.50 on a long trade that it held for one session before reversing short. Signum EBL reversed short and lost -$188.74 for the week but tacked on some open trade equity on the current position. Mesa Notes is holding long in the TY and watched as the open trade equity went negative as bonds sold off sharply throughout the week. For the week, the system lost -$906.25. Signum TY is also holding long and lost -$937.50. Mosaic eRL had six trades for a loss of -$1,306.

For the day trading systems, BounceMOC eRL was the top performer with gains of +$1,760. Kappa Dax was next in line with profits of +$658.39 on its counter-trend style of entry. BetaCon 4/1 ESX was active with three trades for +$562.07. Compass SP had modest gains of +$375 on two trades.

Rayo Plus Dax had two trades for a loss of -$2,584.66. Finally, Keystone eRL had four trades for a loss of -$3,130.

***Long Term***

The U.S. Dollar moved to multi year and in some cases record lows against major foreign currencies last week sparked by the FOMC decision to cut both the Fed Funds and Discount rate .50 basis points instead of .25 basis points as originally anticipated. Markets seemed to take this surprise as an indicator that the slowing U.S. economy will or has forced investment interests to other foreign domains due to better yields versus those in the U.S. Economic releases in the U.S. this week are a little heavier especially late week with the data more weighted to the pulse of the consumer and manufacturing sectors. Long term trend followers remain in a mostly neutral stance, although Aberration is currently in a short DXZ position currently making +$770.00 (open trade).

Interest Rate futures posted steep losses last week as the buy the rumor sell the fact mantra was in full force after the monthly FOMC announcement. The sector was prepared for the FOMC to cut rates, which was illustrated by the recent rally in futures posting new 8+ month highs a couple of weeks ago, but the action by the FOMC of cutting both the Fed Funds and Discount rates by .50 basis points was a surprise that seemed to lead to ideas that this just may be the tonic for the economic ills in the U.S. which sent futures lower on thinking the Fed will not take anymore immediate action. The upcoming week’s economic releases are heavier with consumer and manufacturing the main targets possibly giving the sector a better view on the condition of U.S. growth. Long term trend followers have positive bias as Aberration is currently long TYZ with a current loss of -$390.62 (open trade) and Long the Dec Bund with a loss -$1990.00 (open trade).

Most soft commodities had a positive tone last week as the FOMC rate cut decision seemed to have a firming affect on the sector with inflationary ideas sending prices higher. Most grains moved higher on ideas that the short worldwide supply of wheat would be of benefit the their price structure after the throws of the harvest in the U.S. are seen. The livestock sector was a mixed bag as lower cash and product markets pushed lean hogs to 9-month lows, although live cattle firmed on ideas that lighter supplies could keep the cash market firm for the time being. Aberration is currently long KWZ making $7897.00(open trade), and long BOZ trade with gains of +30.00 (open trade). The short position in CZ was stopped out for a -$1150.00 loss.

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.