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Trading System Spotlight: Upper Hand ES

August 10, 2009

 

Trading systems are often viewed as the ugly cousin of managed futures programs, given that they are usually more volatile than CTAs, have bigger drawdowns, and don’t have actual results to review.

But as we mentioned in one of our newsletters last October (view it here), it isn’t too much of a stretch to believe that we may now be in the sweet spot for system trading. Trading systems were all the rage in 2000-2002 as the stock market was selling off heavily after the internet stock bubble burst. But many systems which were developed during that time fell on hard times between 2003 and 2006 when the volatility in stock index futures slowed to a crawl thanks to a steadily climbing stock market. But when the record high volatility returned last year, many trading systems again did well, putting them forward as a viable investment alternative for high volatility markets in our opinion.

Coming back to the current time - a number of trading systems have bucked the prevailing downtrend in managed futures this year, with many CTAs and trend following programs performing poorly so far in 2009. Past performance does not guarantee future results, but if you have been looking for investments which have performed well in this high volatility environment without the high minimums associated with many of the CTAs, system trading may provide a good alternative.  Another often overlooked feature is that we can build portfolios of systems to help smooth out the drawdowns, just as we do with CTAs.

Without further ado, we would like to spotlight a trading system which has held its own this year, the Upper Hand ES system from Mr. Jeff Pilsmaker of Boston, Massachusetts.

Who is The Developer:

The Developer of Upper Hand ES is Jeff Pilsmaker of Pilsmaker Trading Systems.  After graduating with a Bachelor’s Degree in Math in the 1970’s, Mr. Pilsmaker went straight to work in the tech industry as a computer programmer and software architect, working at well known technology firms like Wang Labs, Digital, and Hewlett-Packard.   After nearly 20 years of programming, Jeff reluctantly turned off his coding screen and began a career in management as Director of the Digital VMS Operating System group.    From there he became general manager of a telecom business in New York before leaving the industry in 2005 to concentrate on trading futures fulltime.

Mr. Pilsmaker has had a lifelong interest in the markets and investing.  From an early age Jeff began following along with the stock market and several individual stocks.   It was in the early 1990’s that he found the futures markets after reading an article on futures trading in and investing magazine.  Describing his early experience in futures trading Jeff says “I was looking around for something else to do on the side and tripped over an article on futures trading.   Pretty soon I was hooked.  I opened up a trading account and proceeded to lose money for the next four years.”  To help improve his trading skills Jeff began reading books, purchased an early version of TradeStation and taught himself the platform’s Easy Language programming code.   

Despite his best efforts,  Mr. Plismaker’s early forays into futures markets and systematic trading did not prove as easy as he would have hoped, and he decided to stop trading for two years in the late 90’s while looking for another pursuit to occupy him.   However, the lure of futures trading proved too much, and Jeff was back into the markets in 2001 when he realized: “a fundamental shift in commodities was occurring, going from long term bear to long term bull”.   Armed with this belief, he began trading commodities and found himself taking positions in the crb, gold, and oil; and has been at it ever since.

As time progressed and trading platforms improved significantly, Mr. Pilsmaker eventually became a full time systematic trader who developed and traded his own models with his own capital.  Trading systems development became a means to an end, but Jeff still has a passion for the markets, saying  “Although I spend four hours a day on trading system research and development, I do consider myself to be a futures trader first.”

Jeff now lives in the Boston, MA area with his wife and two children.  When he’s not trading or studying the markets you can find him in the kitchen, at the shore, or possibly on the fishing boat.   Jeff also enjoys giving back to the community and volunteers his time to charitable causes.  

How Does the System Work:

Upper Hand ES is an intraday (day trading) e-mini SP trading system, meaning that it does not hold positions overnight, instead choosing to exit by the close of the market each day. The base logic looks to identify short term trends based on market momentum early in the trading session.   The system analyzes the first thirty minutes of market activity each day, using a series of proprietary momentum indicators to determine whether to enter long, short, or pass on trading that day.   More often than not the system will remain out of the market as the early market momentum is not strong enough to generate a signal in either direction.

Several analysis techniques and filters are used to determine the early trend for the day, but Mr. Pilsmaker would like to emphasize that the system does not use traditional indicators like MACD or moving averages to enter trades.  Rather, the system uses a combination of analysis on price action and volume on the ES market as well as the overall stock market to determine the proper trade setup for the day.    The system trades on 30 minute bars and will make a decision on whether to enter long, short or stay out of market on the close of the first 30 minute bar of the day (9:00 a.m. CST).  Because of this the system is prone to miss trends that occur later in the day.

Once Upper Hand ES is in a trade it has an initial risk level of $800 per contract and uses a hard stop at this level to prevent large single trade losses.  The system also incorporates a trailing stop that moves as trades become more profitable.   Use of this trailing stop means that most losing trades will lose less than the initial risk of $800 per contract as full losses are only taken on trades that go immediately against the system.  [Please note that stop orders cannot guarantee that an order will be filled at the desired price]  If the trade is not stopped out if will look to exit on the cash stock market close at 3:00 p.m. CST. 

The system was designed with an intended short bias, with it more willing to enter short trades. This short bias stems from the developer’s belief that markets tend to fall twice as fast as they rise, resulting in a greater opportunity for profit on a short term intraday basis.  Long positions have more stringent entry conditions but perform nearly as well as short trades in the systems hypothetical computer back testing.  

Because the system is very selective on entry it will on average only trade fifty times per annum or four times per month and is definitely not system that is designed to entertain as well as make money.   This is likely why you haven’t heard of it elsewhere – there’s not money in it for the brokers. On a day-to-day basis Upper Hand ES might even be considered boring, which is fine with Mr. Pilsmaker who is more interested in consistent returns than becoming the next “hot” system on the street.  

Currently, Mr. Pilsmaker is looking to expand the original techniques used in Upper Hand ES to other markets including foreign currency futures and US Treasury futures markets.   He is also has several beta models of Upper Hand that can be traded on longer time frames across an expanded number of markets. 

Attain Comments:

With the rise of sophisticated software for designing and testing trading models, we are approached with the next great day trading system almost weekly at Attain.  Unfortunately, these new systems are usually much too aggressive and seem to always bite off more than they can chew.   The end result is a broken system that is nothing more than an over optimized flash in the pan.  

Mr. Pilsmaker appears to have taken the opposite approach, realizing that the most successful day trading strategies are often those that are overly-selective and not in danger of over trading the customer’s account.   Plus, with a minimum investment of $10,000 and a manageable lease fee of $50 per month a client of Upper Hand ES can get started on this system without feeling the psychological burden of more expensive systems or CTAs with $250,000 to $1 Million minimum investment levels.   In short, this system is a great introduction for anyone who is looking to dip their toe into the world of alternative investments through managed futures and trading systems. 

Beyond affordability, Upper Hand ES can also be a beneficial diversifier for any trader who is usually net long the stock market.    How often do we profile a system that incorporates a short bias?  Most systems are designed to work the same whether buying or selling, for fear of curve fitting one side of the market; but there does seem to be some truth to Pilsmaker’s belief that markets (especially stock indices) fall faster than they rise.

On the downside, a lengthy track record is not this system’s strong suit.  The system was released to the public just last year (in the fall of 2008), meaning the bulk of the impressive hypothetical stats that go along with this system are pre-release hypothetical results.  While all hypothetical results should be taken with a grain of salt, we believe post-release hypos a whole lot more than the time period the program was designed and tested on.

Another devil’s advocate point - despite Mr. Pilsmaker’s impressive tech resume, this is his first system that he has offered to the public. Will this be the first of many successful programs for him, or just a one hit wonder? It remains to be seen whether this system can withstand the tests of time including lower volatility and more condensed trading ranges.   

Overall, we believe Upper Hand ES is worth an extended look. We like its low trading frequency, its easy to understand logic (go with the early trend), and its affordability (just a $10,000 minimum). For someone looking to walk before they run, or someone looking to bet on a return to the March lows for a stock market which is starting to look very overextended (S&P up 49% since the March lows) – Upper Hand ES could be just the thing.

-          John Cummings

 

IMPORTANT RISK DISCLOSURE


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Feature | Week In Review: Stocks hit yearly highs | Chart of the Week

Overview

 The upward trek continued in some sectors as another round of positive inputs; especially from the economic side of the equation help spur another round of multi-month highs. The biases in other sectors seem to reflect anticipation that recent injections of liquidity by governments to help the ailing world economy could be reigned in via rate increase or other means. The release of monthly jobs report in the U.S. was the main headliner and it did not disappoint the marketplace as the unemployment rate actually dropped prompting ideas that economic conditions might be stabilizing. Another round of decent second quarter numbers also added support to certain areas with the earnings season winding down. The balance of the futures arena was fairly subdued with some sectors having the appearance that the dog days of summer have subdued investor appetites for the time being with more focus on vacationing than trading. Economic reports for the upcoming week are on the light side early, but pick up steam midweek with an FOMC rate decision Wednesday followed by inflation sensitive reports Thursday and Friday such as the June retail sales figures and CPI. U.S. equity index futures again posted a strong weekly performance with the Mid-Cap 400 futures +3.88% followed by the Russell 2000 futures +2.34%, S&P500 futures +2.23%, Dow futures +2.18% and NASDAQ futures +1.11%.                

Energy futures were mostly on the plus side during the past week as sector support was seen from stronger U.S. economic news along with ideas of that foreign demand, especially from Asian will remain firm. RBOB Gasoline -0.22% was the lone market that ended below unchanged as the seasonal trend of spreading versus the Heating Oil to induce storage of the latter kicked in. For the week Heating Oil futures ended +4.35%, followed by Crude Oil futures +2.13% and Natural Gas futures +0.57%.   

The metals complex again found support from the positive U.S. economic inputs along with ideas that developing nation economic growth could be better than early anticipated. The positive developments sparked ideas that the manufacturing sector could become more robust leading the industrial metals to strong advances with Copper +6.17% leading the way followed by Palladium +5.42%, Silver +5.22%, Platinum +4.47% and Gold +0.39%.   

Commodity and Food sectors were mixed with price activity being directly affected by production sentiments in most products. In the case of the food sector ideas of smaller than anticipated world crops was a strong catalyst for sharp price appreciation.  Most of the Grain and Livestock markets were hampered by heavy production worries due in most part to near ideal growing conditions. The Soft complex was led higher by Sugar +11.82% followed by OJ +10.65%, Coffee +7.63% and Cotton +3.86%. Grain activity remained mostly in the doldrums with Wheat -7.03% and Corn -6.59%, although Soybeans +5.74% did put in an impressive upside performance due to a strong export pace that has put old crop supply in a fairly tight situation. Activity in livestock was weak as both Lean Hogs -16.70% and Live Cattle -1.00% saw weakness on less than satisfying market internals.   

Currency futures activity was again fairly subdued, but the dip in the U.S. unemployment rate did initiate support in the U.S. Dollar index futures +0.83%. The surprising developments in employment situation prompted a turn in investment ideas in the continentals as investors started to moved more to the dollar base investments. Japanese Yen -2.95% led the decline followed by the Swiss Franc -1.23%, Euro -0.48% and British Pound -0.17%. The employment data was also a big event in the rate sector as the numbers prompted ideas of possible rate hikes by the FOMC to combat inflation possibilities with the 30-year Bonds ending -3.28% followed by the 10-year Notes -2.38%.       

Managed Futures

After a disappointing start to 2009, multi-market managers are looking to bounce back in the second half o f the year.  Thus far August has proven to be the medicine that the doctor ordered as new trends are starting to finally emerge in several commodity markets like Sugar, Cotton, and Wheat.   Several programs that we track have taken advantage of these moves but one that stands head and shoulders above the rest is the Integrated Managed Futures Global Concentrated program which is up approximately +3.84% already this month!  It has been a quick start out of the gate for Integrated and we are hoping that the momentum continues.  

But Integrated isn’t the only manager that has seen success so far in August.   Not far behind is Robison-Langley which is up +3.51% est.   RL is looking to build on a profitable month of July with another good month in August.  Another manager off to a hot start is Dominion Capital Management whose Sapphire Program is up +1.89% est. Other profitable programs include Clarke Capital Global Basic +0.70% est., APA Strategic Diversification +0.32% est., Dighton Capital USA Aggressive Futures +0.23% est., Clarke Capital Global Magnum +0.18% est.,  and Hoffman Asset Management +0.11% est.

Managers in the red include Mesirow Low Volatility -0.06% est., Mesirow Absolute Return -0.22% est., Futures Truth MS4 -0.33% est.,  and APA Modified at -0.58% est.

Short-term stock index traders have had a slow start to August with Paskewitz Asset Management Contrarian 3X St. Index at -0.55% est., and MSLO falling approximately -2.09% est.

It has been a mixed start to the month for Option Traders as both diversified and index-only managers have been forced to deal with sharp moves in commodities, currencies, and indices.   The month’s top performer thus far has been ACE Investment Strategist ahead an estimated 1.03% continuing the programs upward momentum for 2009 (+15.15% YTD).  Other Option trading estimates are as follows: Cervino Diversified Options -0.69%, Cervino Diversified 2x -1.56%, Crescent bay PSI-1.0%, Crescent Bay BVP -0.97%, FCI -3.28%, FCI CPP -3.27%, Raithel Investments +0.17%, and Zephyr Investment Group +0.29%.

Specialty managers have also seen a mixed start to August.  The leader to the upside has been Emil Van Essen with an estimated return of +1.94% MTD – through July the program was ahead +19.26%.  Of all the managers we track, Emil Van Essen is truly a unique approach and in a category of its own.  In case you missed our July 27th CTA Spotlight on them, here is the link: http://www.attaincapital.com/managed_futures_newsletter/344.  Agriculture specialists have started the month down slightly with the NDX at break even and Rosetta down -1.56%.

Trading Systems 

With the exception of trend following programs the first week of August was pretty shaky for trading systems. Both day and swing trading programs escaped the week without breaking the bank but took a step in the wrong direction for the most part.

Beginning with the day trading systems, PSI! ERL and ATB Welcome Dax were a photo finish +$870 and +680€ (~$965.60). Clipper ERL and Viper II ES were the two other day trading programs able to navigate the choppy waters last week +$480 and +$227.50. The Rayo Plus family of programs suffered the largest losses with the original program Rayo Plus Dax -892.5€, Rayo Plus 2130 Dax -2,655€ and Rayo Plus 1815 Dax -2,830€. Other results are as follows: ATB Trendy Balance v2 -652.5€, BetaCon 4/1 -210€, Upper Hand ES -$147.50 and Waugh ERL -$717.34.

Swing trading results had some more positives but the larger negative results overshadowed those positives. Those results are: AG Mechwarrior ES -$1,427.5, Bam 90 ES +$1,292.50, Strategic ES -$365, Strategic SP -$1,300. Ultramini ES -$15 and Waugh Swing ES +$595.

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.