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System Spotlight: Waugh eRL day trading system

March 3, 2008

 

Our Feb. 4th newsletter (http://www.attaincapital.com/newsletters/266) described Attain’s CTA & Trading System performance tables and the ranking system used by Attain to measure hundreds of CTAs and Trading Systems across 25 categories. Those programs which are consistently among the top ranked in each category earn a higher ranking, and one of the top ranked Trading Systems amongst Attain’s recommended list is the subject of this month’s CTA Spotlight.

This month’s System Spotlight is on day trading system Waugh eRL.

Who is Developer:

The Waugh eRL system was developed by none other than Bruce Waugh of Toronto. And don’t blame him for the lack of creativity in the name, Attain came up with it.

Mr. Waugh is a graduate of University of Toronto law school, with a graduate degree from Wharton. He has always been interested in stock market pricing, as evidenced by this Warren Buffet like story: At 14 years old, Bruce noticed anomalies in pricing of a stock warrant and bought and converted ten of them for a nice gain. He continued this for 6 months, eventually doing hundreds of warrants at a time, until the market noticed the anomaly as well (and the broker found out my age!)

Bruce retired early from his role as legal counsel at an Exxon Mobil subsidiary, and took up trading himself, briefly on the floor and then from home when exchange went electronic. He became a client of Attain to invest some personal funds, and started trading what would become the Waugh system shortly thereafter.

As happened with the venerable Compass nearly 10 years ago, we asked Bruce if other clients could trade his system after seeing its success, and the rest is history. He agreed, and we have since made it a publicly available system available only to Attain clients. Bruce continues to trade the system right alongside any clients who subscribe.

Bruce splits time between Toronto and Florida, is married, and enjoys spending time with his two children and one grandchild when playing tennis, golf, or bridge.

How does it work?

The Waugh system is a 100% mechanical day trading system, and while developed for the emini Russell 2000 market – can run on any stock index. But the emini Russell 2000 provides best leverage to cost for small traders in the developer’s opinion.

The system attempts to capitalize on apparent market biases which occur at different times of the day. These so called biases are actually studies on when the persistence of a trend is more likely to happen. The system was built after looking at each 15 minute time frame for thousands of trading days, and assessing which 15 minute blocks tended to see prices continue in one direction more often than not.

For example, it often seems to the traders at Attain that there is a reversal between 10:30 and 10:45 in US markets, and another at 2:30 PM CST. Those are just feelings, of course, but Waugh has tested the validity of those types of “feelings”.

The next step in the systems entry criteria is determining both a long term and short term trend. But bear in mind we’re talking about a day trading system here – so the long term trend is a scant two days, while the short term trend is only the daily trend. When the two trends are in agreement, and the time period is conducive to a trend continuing, the Waugh system enters a trade.

The last piece of the puzzle is a volatility filter, which is designed to eliminate non-productive trades by making sure there is enough volatility for the system to be able to make at least as much as it risks. The initial risk as defined by it stop loss level is $1200.

Attain Comments

Unlike several eRL systems that were developed during the low volatility periods of the past few years, we like that Waugh eRL uses parameters that fit the current market volatility. This includes filters that require a certain trading range to avoid choppy trading days, wide stops that give the system room to “breathe” when it identifies the trend of the day and enters a trade. The downside to the logic of the program is that it could struggle if volatility reverts to its prior low levels.

Successful trades are most dependent on market follow through, as the system appears to only trade during the afternoon and with the daily trend of the market. Much like Compass, the system will be most successful when the market “closes” in the same direction of the trend and does not reverse in the opposite direction of the trend.

Even though the strategy itself is fairly simple, we believe it should only be considered for trading by aggressive traders as this system will trade often (nearly once per day) while risking $1200 per trade. The $10,000 minimum is also a fairly aggressive minimum level, and reflects the developer’s view that Waugh eRL should be used as a complementary system only, not as a the only investment in a futures portfolio. Mr. Waugh actually pairs his day trading system with two option selling CTAs, believing the matching of short and long volatility profiles makes more sense than just putting funds in one or the other. We agree.

In short, Waugh eRL is not for the faint of heart; however it is a great option for those looking for some long volatility exposure to potentially capitalize when the markets are moving.

IMPORTANT RISK DISCLOSURE


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Feature | Week In Review: Commodities hit record highs, as Stocks lose for 4th consecutive month | Chart of the Week

***Overview***

February 2008 was all about commodities and rising prices for common goods like wheat and cotton. No matter where one looked, from grains to energies to metals, commodity prices were moving higher this past month. Some of the market moves were spectacular, with markets like Palladium futures (a sister metal of platinum) climbing +44.71% and Minneapolis Wheat futures gaining +30.13% ; while other markets like Crude Oil futures at +10.97% continue to steadily climb higher. Undoubtedly the world economy is in the midst of a commodity boom and there are no signs of it coming to and end anytime soon.

The largest commodity gainers in February included the metals markets which saw (in addition to Palladium) Copper futures climb +16.71%, Silver futures gained +16.38%, Gold was up +5.06% and Platinum returned +2.55% . Predictably the energy markets also enjoyed large rallies due to $100 Crude Oil and cold temperatures across most of the US. Natural Gas futures led the way gaining +15.39%, Heating Oil futures were up +12.22% and RBOB Gasoline futures traded +6.57% higher for the month. Perhaps the most surprising market moves where found in the grains and softs. It is not very often that one grain or soft (tropical) market trades higher than 10% in one month; but this past month we saw unbelievable moves in Soybeans +18.74%, Chicago Wheat +16.21%, Cotton +17.55% and Coffee at +18.47%. Plus don’t forget about the +30.13% gains in Minneapolis Wheat as well; crazy times indeed. Other markets on the move include Sugar +1.43% and Lean Hogs at -9.28%.

Unfortunately for those invested in US Stocks, the commodity rally did not carry over into the stock market. Recession fears along with general market uneasiness caused stocks to finish in the red again in February, the fourth straight month of losses for US markets. NASDAQ futures led the fall losing -5.36% as several tech heavyweights including GOOG got hit hard in February. Elsewhere SP 500 futures fell -3.50%, DOW futures where down -2.44%, Russell 2000 futures lost -3.94% and SP Midcap 400 futures finished the month -2.11% lower. In currency trading the US Dollar continues to get hit hard with Euro trading to new record highs in February. Eurocurrency futures were up +2.19% for the month, while US Dollar Index futures fell -2.04%. Swiss Franc futures at +3.61% and Japanese Yen futures at +2.16% also enjoyed strong months against the greenback.


***CTAs***


February trading conditions were nearly perfect for multi market CTAs who look to let winning trades in commodity markets run, and the results didn’t disappoint – with 11 different CTA's Attain tracks posting February returns over 10%, and several achieving over 25% on the month.

Those mangers who we expect to make it into the 25%+ club for February included Vision Capital Management +38.71%, Attain Portfolio Advisors Modified Program +30.25%, and Clarke Capital Management Millennium Program +27.36%. Both Vision and Clarke are looking for longer term commodity trends while Attain's strategy incorporates a shorter term philosophy on a wide range of commodities and global stock indices that is designed to capitalize on volatility.

Mangers posting 10% or greater returns for the month included Clarke Global Basic +12.61%, NDX Shadrach +12.60, Clarke Worldwide +12.23%, Crescent Bay BVP +10.5%, Attain Strategic Diversification Program +10.06%, and Hoffman Asset Management +10.0%.

There were quite a few other mangers who posted solid returns for February - you can review our early estimates under the CTA Performance section of our website http://www.attaincapital.com/cta_performance.

It is no surprise that the mangers who struggled in February were those mangers who primarily sell volatility by selling options on commodities. With commodity volatility screaming, strategies like FCI (-1.26%0, Cervino COP (-5.52%), and CKP (-12%) struggled. In light of the recent losses, the CKP advisor has decided amend his strategy in order to reduce margin requirements, the number of trades, and correlation of markets traded. For anyone currently involved in the program this revision represents a material change in the strategy and you should evaluate the new strategy before continuing on with the trading.

In Managed Forex trading, currency markets finally moved out of their recent sideways trend late in the month giving mangers like K3 and Wallwood the opportunity to recoup some of their losses from earlier in the month. K3 still ended down -2.97% and is down -3.47% for the Year so far. Wallwood FX earned +1.14% in Feb and is also down for the year. Over time we expect for the US Dollar to eventually shift course from its 4 year decline but in the mean time should the down trend continue we expect the FX mangers to have a chance to capitalize.

 

***Day & Swing***

It looked as if equities might be on the mend towards the end of January, but that quickly changed as a slew of economic reports sent stocks lower throughout the month of February. Swing trading systems, trading both stock indices and bonds, had breakout months and appear to be set up well to continue to profit from the increased volatility. Day trading systems struggled as a whole despite some huge trading ranges as there were several days with 10-20 point swings in a matter of minutes which makes it nearly impossible for any day trading system to hold onto the trades long enough to be profitable without ignoring risk altogether.

The top performer of the swing systems, Tzar ES, hit the nail on the head with profits of +$6,852.50 for the month. The program went into the month short, then reversed to long as the market moved lower over the first few days of Feb, before reversing short again and holding that position for the remainder of the month. Tzar NQ had a similar pattern of trades and profited +$4,176.85 for the month including +$3,928.71 on two closed out trades. Mesa Notes has been extremely active due to the increased volatility in bond markets and made +$3,261.73 for the month of February. In just two months, Mesa Notes has already traded almost half as much as it did all of last year. Jaws US 60 and US 450 were both profitable by +$1,795.30 and +$1494.50 respectively. Signum TY got whipped around in the first part of the moth but ended up +$816.42 after racking up some open trade profits on the current long trade. Other profitable swing systems in February were Bounce EMD which made +$1,070.77 on two trades and PGA Powergrowth2 which made +$400 across the portfolio of markets that it trades.

On the losing side, Signum EBL lost -$215.75 after reversing a couple times throughout the month. The current long trade looks promising as the Euro Bund approaches new recent highs set back in late January. Bounce eRL lost -$768.36 after an unfortunate stop-out that would have gone on to reach its profit objective similar to that of the eMD program. Ultramini ES struggled to find direction last month and lost -$1,547.50 while the YM lost -$2,345. Tzar eRL did not perform like the ES and NQ systems and lost -$1,930. The system entered the month long unlike the other systems that have been holding short for a few weeks now.

Day trading system profits were few and far between. Rayo Plus Dax made +$2,702.63 on ten trades for the month. BounceMOC eRL was up +$7.04 and BetaCon 4/1 ESX +$4.71. Other results were Waugh eRL -$371.78 and Compass SP -$1,907.75.

 

***Long Term***

The Agriculture/Food, interest rate and metal sectors continued to be the main focus for long term traders again in February as inflation fears continue to bring heavy buying into the commodity sectors, as well as worries of tightening world supplies.

Recession ideas in the U.S. continue to keep many markets on edge and extremely volatile, but most long term trends remain stout despite the wild swings. The interest rate sector did post slight losses during February on news of less that stellar auction results, but gained most of the losses back late month on worries of more financial strain. Aberration had a long Euro-Bund position stopped out for a loss of -1610.00EU, while continuing to hold long Ten-year Notes with a gain of +$10,136.62 (open trade) Relativity is long Eurodollar with profits of +$2225.00, while having

The U.S. Dollar remained under pressure with new historic lows being seen against some foreign currencies as the continued rally in inflation sensitive commodities sparked an active downside move. Aberration and Relativity both hold short Dollar Index positions, making +$440.00 (open trade) and $735.00 (open trade) respectively.

Grains and oilseeds continued their January surge on ideas of further tightening of supplies due to large appetites in Asia and the Southern Hemisphere. Aberration is long Bean Oil with a gain of +$16,554.00 (open trade), long Corn making $6900.00 (open trade), while Relativity is long Palm Oil making +3150MR (open trade) and long long TGE Corn for open trade profits of +185,000JY.

The cocoa, coffee, cotton, and sugar areas also rallied on ideas that inflation and planting scenarios would lift prices higher. Aberration is long the Sugar with a gain of +$1780.00 (open trade) and long the Cotton with a gain of +$2595.00 (open trade), while Relativity is long Cocoa making +$3810.00 (open trade),

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.