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Trading System Spotlight: Spyder Soybeans, Crude Oil, and S&P 500

November 16, 2009

 

Commodity markets and the algorithmic systems designed to trade them have come a long way over the last 10 years.  Back in the late 90’s with the trading pits still roaring and with the internet still in its infancy, most system traders would never have attempted to trade intra-day in volatile markets like Soybeans and Crude Oil as the cost of doing so (slippage) simply would have negated any profits that the system generated.    The norm for markets like these was to throw them into a portfolio of markets followed with a trend following system.

But when fast forwarding ahead to 2009; twenty four hour electronic trading is now the norm as investors are trading commodities worldwide with a click of a button.   This evolution of the electronic marketplace has allowed system designers to expand their offerings and develop short term strategies that take advantage of short term moves in markets like Soybeans & Crude Oil.  Today’s spotlight is on just such a system:  Spyder from David Imgraben of Midshipman Services, Pty. Ltd.

Who is The Developer:

Long time newsletter readers and clients might already recognize the Midshipman name and Mr. Imgraben, as he is also the developer of the JAWS trading systems (part of the Narrowneck Portfolio) that have traded at Attain since 2004.  

Mr. Imgraben started trading futures in 1992 after some success in commercial property management on Australia's then booming Gold Coast. Ironically, his family still owns and operates a surf shop which they put into an empty suite in one of the buildings David developed in hopes of bringing some life to the building.

His interest in trading futures was sparked by a friend who traded Australian index futures on the Sydney Futures Exchange.   David quickly found that discretionary trading was not for him and that he needed to develop mechanical and quantifiable approach.   This led David to go down the path of developing trading systems and launching Midshipman Services.    His earliest systems were programmed in spreadsheets using manual, end of day updates.   As the electronic markets evolved and better trading software programs like Tradestation became available David began concentrating his efforts on trading the electronic bond markets.  This ultimately led to the development of the JAWS Narrowneck Portfolio. 

More recently, David has concentrated his efforts over the last few years on consulting with corporate clients on system development.   Clients have included prop trading desks, risk management systems, and boutique fund allocations.  It was during this time that Mr. Imgraben developed the SPYDER suite of systems that we are profiling today. 

Currently, Mr. Imgraben is focusing on systematic trading strategies for individual CFD’s (contracts for difference) for Australian equities.    Editor’s Note: CFD’s are not available for investment in the US.

How Does the System Work:

The original idea for the SPYDER trading system came while David and his consulting team were helping a proprietary trading group hedge their energy option trading.  The group had a need for a strategy that would help them identify hedging levels during the transition from the close of the London market to the open of the option pits in New York.    It was during this time that Mr. Imgraben began to explore the development of a trading system that used both overnight and intra-day data for short term position trades.  His thought was that the market activity that occurred during the European and overnight GLOBEX trading session should carry over to the US day session.

SPYDER is a short term position trading system that is designed to take short term position trades in Crude Oil futures, 30 Year Bond futures, and Soybean futures contracts.  What makes this system unique is that the strategy analyzes what happens during the overnight trading period before putting on trades during the US session. After identifying an overnight trend the system will then look for confirmation of this trend during the US trading session.  If confirmation occurs the system will then wait for a small pullback by the market before entering a long or short position. 

Another unique characteristic of this trading strategy is its multiple position strategy.  The multiple position strategy is an algorithm that will kick in and allow the system to take multiple positions when the market is moving against the original position.   This does not occur on every losing trade and is only initiated when the market price action dictates an area of support or congestion.   Approximately 30% trades will include an additional position.

For exiting trades, SPYDER uses both a dynamic stop and profit target that are derived from market volatility. Included in the dynamic stop is an indicator that is designed to predict when a trend is beginning to fail.  If this indicator determines that the market trend is beginning to fail the system will cover all open positions at the market.  [Disclaimer: Stop orders can not guarantee an order will be filled at the desired price]

While the SPYDER short term position system uses overnight data for trend identification it does not trade 24 hours.  The system will only trade during the US trading session and the average trade hold time is approximately one day.   Risk per trade is variable as the system uses market volatility to determine stop levels.  The hypothetical average loss per trade is close to $1000 with a hypothetical max loss of $3000.  (this is not the absolute maximum loss that the client may be subject to)

The SPYDER strategy can also be used as more traditional day trading strategy on the full size SP and emini SP futures contracts.   The SPYDER strategy has been slightly modified as it will only take 1 contract per trade (no multiple positions) and will exit all trades at the end of the US day session.    The system will use both Daily and 60 minute bars however it will not use overnight data for trade decisions.  This system is listed as SPYDER SP DT on our website.  

Finally, Mr. Imgraben has also included a short term SP Breakout Strategy called SPYDER SP Breakout for trading on the full size and emini SP.   This strategy is a traditional breakout strategy that is suited for volatile trading environments.    Mr. Imgraben recommends that clients who trade SPYDER SP DT program also consider Spyder SP Breakout for diversification purposes.   His studies have shown that taking the long Spyder SP Breakout trades in conjunction with short Spyder SP DT trades is optimal although there are not any clients doing this now.

Use the following links to view how Spyder has performed on the various markets:

Spyder DT SP                     Spyder Breakout SP

Spyder US                           Spyder S

Spyder CL

 

 

Attain Comments:

Short term momentum position trading has been the hot topic of discussion in the CTA universe this year.   This is because many short term momentum strategies have outperformed their trend following peers in what otherwise has been a very difficult 2009.  So, it does not come as a surprise that we are now starting to see some of this interest trickle down to individual trading systems.

Mr. Imgraben submitted the SPYDER suite of systems to us in June of 2009.  Since then we have been diligently paper trading the system and performing walk forward analysis.   To this point the system has held up as expected and we believe it will continue to do so moving forward as long as the markets remain volatile enough to support this type of trading.    

The fact that this system works across multiple markets and sectors is another feather in Mr. Imgraben’s cap.  It is rare to find a publicly available trading system that has shown the ability to trade in commodities, stocks, and bond futures.   Typically this type of system only available to larger traders who have can afford CTA investment exposure. 

As for the cons, the SPYDER system is a newer strategy and has only been available for trading for a few months.  New systems always look great when they come out of the box and sometimes take a while before the kinks are all worked out.   Therefore we should expect that the next largest drawdown is in the future for SPYDER in each market.   Second, it is also worth mentioning that SPYDER has struggled a bit trading Soybeans and Crude Oil so far this year.   Billion Dollar managed futures programs have also had trouble trading these markets this year, so that doesn’t  totally rule them out in our opinion.  Plus, we do stress the program’s performance through running performance using higher slippage and commission levels than we might realistically get trading a single contract with the program.

The day trading, stock index portion of the program, meanwhile, has forward tested better with both SPYDER Breakout SP and SPYDER DT SP generating hypothetical gains since June 2009. [Past performance is not necessarily indicative of future results].

Overall, we believe getting exposure to different markets such as Soybeans and Crude Oil in the shorter time frame space (hold periods less than two days) can only be a good thing moving forward as those markets morph more and more into full blown electronic marketplaces with the depth and liquidity of the emini S&P futures.  The slippage (difference between where the system thinks you got filled and where you actually get filled) in these electronic markets via auto-execution software will tell the story for the Spyder systems. If we can keep it below $50 per round turn, the system’s future looks very bright. If it creeps up to the $150 or higher, that will likely be too much for the active system to overcome.

If you don’t necessarily feel like going long Crude Oil after it has nearly doubled this year, but also fear getting in front of obvious positive momentum – a system like Spyder could be a good choice for you, giving exposure to the market and its volatile day to day swings without committing to a long term direction.

 - John Cummings

IMPORTANT RISK DISCLOSURE


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Feature | Week In Review: Gold rallies to new all time (nominal) high | Chart of the Week

Overview

Market activity in most sectors of commodity and index futures was mixed to firm during the past week as another round of favorable economic data and some surprise earnings from the retail sector helped support most areas. The recent action by central banks leaving key lending rates unchanged with hints that low rates would be the norm in the foreseeable future also aided most areas, but the news did pressure the U.S. Dollar. European news was mixed as housing figures in the U.K. improved, but month on month investor confidence fell according to a European report. Asian headlines continued as a market supporting factor with news of the export slump abating and industrial output and retails sales again strong in October. The lineup of economic reports this week is fairly heavy with a mixture of economic, manufacturing and housing figures to be released headlined by the PPI and CPI mid-week. Stock Index futures were fairly active during the past week posting a second consecutive week of advances after 2 weeks in a corrective phase with the tech heavy  NASDAQ futures +3.38% leading the way followed by Mid-Cap 400 futures +2.73%, Dow futures +2.65%, S&P 500 futures +2.36% and Russell 2000 futures +1.28%. 

The metals complex ended the week mostly higher with industry reports still indicating strong demand and a possible end to the recent export slump. These reports aided a strong advance in industrial metals with Palladium +7.75% leading the way followed by Copper +4.58% and Platinum +3.48%. Investors remain fixated on the Gold +1.92% not only as an inflation hedge, but also a hard asset play; pushing it above $1,100 to new all time highs. Silver -0.57% was capped by profit taking and weaker energy price action.

The U.S. Dollar Index -0.68% again lost ground to the majors with strong metal prices and slow growth in the U.S. versus that of emerging economies as the main catalysts. The market sector was also volatile due to all of the Central Bank announcements that seem to indicate a low rate environment is here to stay for the foreseeable future.  The Swiss Franc +0.53% led the majors higher followed by the Euro 0.41%, British Pound +0.39% and Japanese Yen +0.16%.  The rate sector found a bit of a bid from the news with 30-year Bond futures ending +0.85% followed by 10-year Note futures +0.14%.       

Commodity and Food products were mixed as weather issues continued to spark investor support in the grain complex, with ideas of a slower U.S. economic pace sparking pressure in the other sectors. Weather concerns again led to higher prices in the grains as the U.S. harvest of Corn remained way behind schedule as do wheat seeding in the SRW belt. Wheat +8.41% led the way followed by Corn +6.38% and Soybeans +3.35%.  The livestock arena was lower as Live Cattle -1.88% and Lean Hogs -1.26% were under pressure from rising grain prices along with ideas that demand will weaken for the last 2 months of 2009. The Soft arena was steady to weak from worries that slower economic conditions could put an end to fears of a supply rationing situation. Coffee -5.62 felt the most pressure followed by Cocoa -3.55%. Sugar +1.29%, Cotton +0.84% and OJ +.26% found support from Brazilian weather worries.  

The energy sector was under pressure during the past week as supply and demand scenarios continued to favor weakness in price activity, especially in Natural Gas -4.28% and Heating Oil -2.14% due to warm weather conditions hampering heating demand. Crude Oil -1.26% and RBOB Gasoline -0.60% were pressured by higher weekly supply figures.        

Managed Futures

Half way through the month,  Option Trading Managers are once again sitting atop the performance charts.  Leading the way thus far with an estimated gain of +5.31% is Raithel Investments Target Volatility program.  Other November estimates are as follows: ACE Investment Strategists +2.13%, Cervino Diversified +1.22%, Cervino 2x +2.55%, Crescent Bay PSI +1.52%, Crescent Bay BVP +3.45%, FCI OSS +2.82%, FCI CPP +1.77%,  HB Capital +1.02%, and Oak Investment Group +1.73%.

Within the above group, it is noteworthy that the current level of the FCI OSS program represents new equity highs for most investors who have stuck with the program through the past 15 months of drawdown (July 2008 peak).  Congratulations to the investors who held on through this stretch and a big THANKS to FCI and their team for actively implementing their improved risk management to help navigate these volatile times.  The program is ahead approximately 30% YTD.

Specialty manager performance is slightly ahead so far this month with Emil Van Essen’s Spread Trading Program leading the way +0.77%.  The low minimum program was ahead 18.39% through October.  Elsewhere for the month; NDX Abednego is ahead +0.12%, NDX Shadrach is +0.08%, and Rosetta is +0.02%. 

Multi Market managers continue to see mixed performance due to increased market correlation. Hoffman Asset Management is the top performer this month with estimated returns of +1.90% est.   Robinson-Langley +1.90% est. is also putting together a nice month of trading and is neck and neck with Hoffman.   Integrated Managed Future Global Concentrated is closing the gap as well at +1.23% est.  Other managers that are doing well to this point include Clarke Global Basic +0.90% est., Futures Truth SAM 101 +0.79% est., and Mesirow Financial Commodities Absolute Return +0.54% est.

Managers that have struggled to this point include Mesirow Financial Commodities Low Volatility -0.12 est., APA Strategic Diversification -0.45% est., GT Capital -0.54% est., Clarke Global Magnum -1.07% est., Sequential Capital Management -1.14% est., APA Modified -1.25% est., Futures Truth MS4 -2.02% est., Quantum Leap Capital Management -3.10% est., Dominion Capital Management -3.22% est., Dighton Capital USA Aggressive Futures -3.38% est.,

Finally, short term index trader Paskewitz Asset Management Contrarian 3X St. Index continues to trade well in November at +0.47% est.

Trading Systems 

Trading systems ended last week with a moderate performance across day, swing and long time frames. Out of the three time frames Swing trading systems outperformed both day and long term; followed by Day trading with a positive performance.

In Swing trading systems this week, Strategic SP traded three times with a total performance of $9375, and sister system Strategic ES followed its foot-steps with three potential trades with a total performance of $1847.5, followed by Ultramini ES with $915 on two trades in the week. Finally,  Jaws60 US captured $32.5 on a single trade. On the other end of the spectrum,  Polaris ES ended -$1330 on single trade, followed by Jaws400 US with -$873.75 on single trade.

Moving to our day trading systems, Compass SP continued some nice recent performance with +$1950 on two trades (Compass ES +$365_. Clipper ERL followed suite with a net performance of $790 on three trades. Followed by UpperHand ES with $607.5, BounceMOC EMD with $560, PSI ERL with $387.5, BounceMOC ERL with $184, Freedom ES with $182.5, Viper III ES $96.19 and BetaCon ESX with $20. On the losing side, Bounce EMD lost -$40, RMESA3 ERL -$113.42, and Waugh ERL -$324.44. Finally, Spanish systems ATB Trendy Balance v2 lost -$837.5 as one good trade $1977.5 was overshadowed by four less good trades,  and Rayo plus followed suit losing -$2275.

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.