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Trading System Spotlight: Strategic ES & Strategic S&P

February 22, 2010

 

We profiled our top ranked managed futures program, Paskewitz Asset Management, in last week’s newsletter, and are following form this week by highlighting one of our top ranked trading systems - Strategic ES, and its sister system Strategic SP. Both titles were profitable in 2009 (hypothetical results), outperforming most trading systems and many CTAs.

The Strategic franchise was launched in late 2008 by well-known developer Andrew Gibbs, who has authored several other trading systems at Attain including the popular AG Mechwarrior ES program.  About the same time, Mr. Gibbs expanded his company and rebranded it as Strategic Capital Management.  Since then, Strategic Capital Management has expanded operations and now offers five actively traded systems at Attain.  Mr. Gibbs also offers a host of systems for trading Australian and Asian stock index futures and we look forward to potentially offering them in the near future.

Who Is The Developer?

The developer of the Strategic system is the aptly named Strategic Capital Management and its founder Andrew Gibbs. Mr. Gibbs comes to us from Auckland, New Zealand where he works year round as a system developer and broker.  In August 2008, Mr. Gibbs launched Strategic Capital Management with the goal of providing a quality futures, FOREX, and options brokerage to residents of New Zealand.  After 4 years of actively writing and marketing trading systems, Andrew recognized the need for a quality system assist brokerage in New Zealand.  In addition, he also began to investigate ways to trade Australian Stock Index futures (ASX 200 and SPI) along with the Hang Seng Index based out of Hong Kong.  The result was the new brokerage company along with a host of new systems including Strategic ES and Strategic SP.

Andrew Gibbs got his start developing trading systems approximately 10 years ago after reading his first technical analysis book, and later becoming self taught in programming.  Andrew credits many of his trading ideas to the infamous Larry Williams, whose book “Long Term Secrets to Short Term trading” inspired the philosophy behind Gibbs’ trading systems.  Ironically, Mr. Gibbs mentions that this very same book could be the best book ever written on how to “curve fit” a trading strategy, and that it is necessary to take extra care to ensure robustness by only looking for market anomaly’s that are likely to repeat themselves in the future.

Currently, Andrew is registered with the New Zealand Exchange as a Futures & Options Advisor.  His educational background includes a bachelor degree in Economics and Accounting, along with a Post Graduate Diploma in Applied Finance and Investment.  Andrew has nearly 10 years of experience in the investment arena, starting off at Goldman Sachs (New Zealand Office) before moving to Australian brokerage firm Tricom, where he was an equities and derivatives advisor.  Mr. Gibbs is now self-employed at Strategic Capital Management and says, “He is living his dream and has the best job in the world.” 

Outside of the office, Mr. Gibbs enjoys playing soccer, touch rugby, and fishing for snapper.  He prefers to remain active outside of work, saying that physical activity provides great stress relief after a tough week of trading.

How Does the System Work?

Mr. Gibbs believes the secret behind Strategic ES is that it is not just one system; and instead is eight systems built into one model.  The eight different subsystems include models that specialize in trading overnight gaps, continuation patterns, range expansions, seasonality, counter trend, reversal logic, and volatility based entries.  The combination of these entry strategies along with an aggressive exit strategy has resulted in a unique short-term momentum-style trading model that can operate on many different market environments and be applied to a variety of markets including the SP, ES, NQ, ERL, EMD, US, and CL.  The individual components are as follows:

Overnight Gaps – An overnight gap is where the market opens significantly above or below the closing price of the previous day. This can suggest significant volatility lies ahead, and Strategic looks to play this setup by either going in line with the gap (if smaller) or fading the gap in expectation of it reversing course (if larger).

Continuation Patterns – Strategic attempts to identify low risk entry points that can get the system into the market in the direction of a strong trend, by looking for continuation patterns.  A simple example of a continuation pattern would be a market, which is making higher highs and lower lows.

Range Expansions – Most long volatility systems operate using range breakout logic.  This logic brackets the market when it enters a lower volatility consolidation pattern, and the Strategic system includes this logic as well – looking to identify periods where the market has been quiet for a specific period, in hopes of anticipating when and where the market is getting set for some short term explosive moves.

Seasonality – This is one of the main parameters which sets Strategic apart from many other trading systems. The system uses seasonal analysis such as going long on the first trading day of the month and the Monday before options expiry. In addition, a seasonality filter is applied across all other trading parameters, requiring that they occur in the same direction as the current favorable seasonal period in order to trigger a trade.

Overbought/Oversold – This is another component which sets Strategic apart. Most trading systems either look for a breakout from a move higher or lower, or fade the move in hopes of prices reverting to the mean – not both. Strategic has components which do both, and the overbought/oversold component looks for opportunities when the market overextends itself in either direction, putting in orders to fade the crowd and to trade a snap back in the opposite direction.

Reversals – Similar to the oversold component, the reversal logic within Strategic looks to identify periods where the market has over-extended itself on a specific day, in anticipation of a move in the opposite direction on the following day.

Volatility Entries – this parameter is in stark contrast to the preceding two, but they somehow co-exist in the Strategic logic.  This logic looks for trade entries x% above and below the opening price of each time period throughout the day, looking to get in line with a big move in one direction or the other once the market has moved significantly outside of the normal “noise” level.

Exits – no model would be completes without considering the exits, and Strategic’s exits are again based on the market moving x% above or below the opening price of the time period immediately following a set amount of time (Mr. Gibbs is keeping what exactly that time frame is to himself) the system has been in the existing position.  The system also incorporates several other exits, which trail the stop and exit the trade early should the market reverse against the original position. [Disclaimer: stop orders cannot guarantee an order is filled at the desired price]

Attain Comments:

Trading systems with incredibly impressive hypothetical track records are unfortunately everywhere, leading most to discount track records which look too good. After all, who would release a trading strategy that has a downward sloping equity curve in back testing.  This is another way of saying do not always believe what you see.  The silver lining of the financial crisis of 2008 (along with the subsequent recovery of 2009) is that investors were able to measure side-by-side how a particular investment fared during the wild volatility of 2008, followed by the anti – climatic and much calmer recovery of 2009.  However, unlike stocks  which fell dramatically in ’08 before bouncing back in ’09; most managed futures products had a great year in 2008, followed a disappointing 2009.  The reason is that many trading systems are designed to be long volatility plays, e.g. they perform best when market volatility is expanding.  With this in mind, it is not surprising that 2008 was a banner year for trading systems.  However, the difficult part is finding a single system that backed up the profits of 2008 with another positive year in ’09. 

Strategic ES (+6.23% ROR, with a max drawdown of -38.25%), along with Strategic SP (+38.61% ROR with a max drawdown of -29.90%), is one of the few long volatility type trading models that posted positive [hypothetical] results this past year. Although the results aren’t as impressive as prior years, the system still outperformed most other short term trading models as well as the New Edge AlternativeEdge Short-Term Traders Index which was down -4.01% in 2009.  The fact that the system succeeded when so many others failed leads us to believe that Strategic is not the typical over optimized trading system and is robust enough to succeed in the most difficult market environments. 

Sure, it will have volatile periods such as last year’s max DD of close to -40%, but many believe that risk is worth taking when viewing the potential rewards.  According to Mr. Gibbs, the system thrives when there are sharp reversals (1-2 day spikes) off medium term (5-10 day) market trends.  In a perfect world, volatility as measured by the VIX would also be at a high level and increasing ala 2008; however this is not absolutely necessary for the system to have success.  When asked how he expects the system to perform over the next twelve months, Mr. Gibbs had the following comments: 

“If I have a guess at what the next 12 months will look like, it appears we are in an environment where any increase in economic growth is going to be offset by rising interest rates, which will result in a stronger US dollar.  In addition, we are also likely to see a decline in fiscal stimulus given the huge debt the US government has racked up in recent years will need to be paid off.  The result will most likely be a very choppy and volatile market which may not be overly strong for a few more years. It is these conditions, in my opinion, where you want to be invested in a trading system that can profit from these types of moves and Strategic is one of the systems that typically fits the bill. The the only real way to go is to invest in a system and stick with it so that when the favorable conditions do appear, you’ll be along for the ride.”

Another positive aspect of Strategic is that Mr. Gibbs is a veteran system developer, despite being relatively young at 30 years old.  We have been working with Andrew since 2004 and have experience trading his first release of systems including AG Mechwarrior ES, AK47 ES, and AG Xtreme SP.  In addition, Mr. Gibbs also just released two newer systems MoneyMaker ES and MoneyBeans S that are actively trading for clients.  The fact that Mr. Gibbs has developed strategies that are still being traded by clients 6 years later, and are operating across different time frames and a variety of markets is a big plus for us which allows us to trust him as a developer.

What’s the downside? Well, despite all the accolades that we give Mr. Gibbs and the Strategic system, the system’s client traded track record is still relatively short at 15 months (and 12 of those were well below what could be expected from the backtesting).  So while the system is not brand new, it is still a baby when compared with a system like Compass (over 100 months of client trading), meaning it still has much to prove before we anoint it the holy grail of short term trading. 

We’re apt to give this system the benefit of the doubt since it a. comes from Andrew Gibbs, and b. was profitable during one of the most difficult trading periods in recent market history.  However, we still wish we could jump in the time machine and fast-forward 5 years to see if this strategy can indeed hold up over the test of time.

A second yellow-flag for us is that the system has not tested as well on markets outside the SP & ES.  The system has performed just fine on the NQ, ERL, EMD, & US, however the SP 500 is definitely the market of choice when considering risk vs. return.     

Finally, there has been some concern amongst clients as to why Strategic SP outperformed Strategic ES in 2009.  Overall, both Strategic programs had a successful year in 2009.  However, the 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.

In conclusion, Strategic looks to be a classic long volatility trading system which should do well when volatility spikes, and at least in 2009 – performed ok even when volatility was on the wane. Add to that our comfort level with developer Andrew Gibbs and longevity of his original systems (still trading 6 years later), we think Strategic is a nice fit for any investors looking to add a higher risk, high potential reward trading system to their portfolio.

 

John Cummings

IMPORTANT RISK DISCLOSURE


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Feature | Week In Review: Stocks & commodities rally despite continued strength in US Dollar | Chart of the Week

Overview

A surprise discount rate hike by the Federal Reserve was the big news of the week, even though most agree it will have no real affect on lending. Stronger economic releases, better corporate news and the increase in the discount rate were the main ingredients for a decent rally in the stock index sector. For the week the Mid-Cap 400 futures +3.08% led the parade higher followed by Russell 2000 futures +3.04%, S&P 500 futures +2.51%, Dow Jones futures +2.58% and NASDAQ futures +2.02.

The exodus out of commodity sectors abated during the past week despite light support in the U.S. Dollar with a better performing U.S. economy leading to stronger growth ideas. These beliefs were very evident in the both base and precious metals. For the week Copper futures +8.93% led the rally followed by Silver futures +6.25%, Palladium futures +5.87%, Gold futures +2.94% and Platinum futures +2.15%.   The economic feel good story also filtered into the energy area despite reports that current supplies are very plentiful. Crude Oil futures +8.19% led the advance followed by Heating Oil +7.81% and RBOB Gasoline +7.14%. Natural Gas -7.16% was pushed lower by heavier than expected weekly supply and spread trading against the balance of the complex.             

The EU agreement to help Greece get through current debt issues helped cap recent upside momentum of the rally in the U.S. Dollar +0.39%. The Japanese Yen -1.66% and British Pound -1.29% were under the weather from weak economic results. The balance of the sector was mixed with the Euro ending -.10% and Swiss Franc finished +0.04%. 

The rate sector was victimized not only by the surprise discount rate hike by the Fed, but also   another round of better economic reports. The 30-year Bond futures ended -0.79% and 10-year note future shed -0.82% for the week.     

Commodity and Food products were mostly higher with worries of crop problems in the southern hemisphere aiding some gains. Lower U.S. production for livestock was also a main market feature. In the grains, Corn ended the week -0.43% with Wheat +0.56% and Soybeans +0.04%. The livestock sector ended with a strong upside flourish as Live Cattle +2.42% lead the way followed by Lean Hogs +2.20%. Soft sector price appreciation was led by Cotton +5.43% followed by Coffee +2.05%, OJ +0.83% and Cocoa +0.19%. Sugar -1.41% was under siege from expectations of larger upcoming crops.    

Managed Futures

After starting the month off red-hot, multi-market managers have cooled off a bit over the past two weeks.  Short-term traders continue to outperform long-term trend followers as volatile market reversals are providing good trading opportunities for shorter-term strategies.  Leading the pack thus far is Futures Truth SAM 101 at +4.30% est.  Futures truth continues to find success trading in grains, bonds, currencies, stock index, and energy sectors.  Dominion Capital Management Sapphire program is another trader that has done well in February at +2.59% est.  Other profitable short term traders include GT Capital +0.59% est., Mesirow Financial Commodities Absolute Return +0.46% est., and Mesirow Financial Commodities Low Volatility +0.16% est.

Longer term multi-market strategies that are in the black this month include Covenant Capital Management  Aggressive +2.49% est., Dighton Capital USA Aggressive Futures +1.30% est., and Accela Capital Management Global Diversified +0.63% est.

Unfortunately, there are quite a few managers in the red as well.   Managers that are down so far in February include Robinson-Langley -10.37% est., Clarke Capital Worldwide -4.77% est., APA Modified -3.80% est., Clarke Capital Global Basic -2.64% est., Futures Truth MS4 -2.14% est., APA Strategic Diversification -2.10%, Quantum Leap Capital -1.41% est., Clark Capital Global Magnum -0.90% est., Integrated Managed Futures Global Concentrated -0.77% est., DMH -0.37% est., 2100 Xenon Managed Futures (2X) -0.31% est., and Sequential Capital Management -0.21% est.

Option managers continue to have a good month with FCI Option Selling Strategy leading the way at +3.62% est. and FCI CPP at +2.19% est.   Other option managers in the black include Crescent Bay PSI +1.86% est., HB Capital +1.48% est., Crescent Bay BVP +0.90% est.,  Cervino Diversified Options 2X +0.30% est., and Cervino Diversified Options +0.17% est.  There are a few option managers in the red including ACE SIPC -0.38% est., ACE DPC -0.75% est, and Oak Investment Group Ocrant Agricultural Options -3.68% est.

Specialty managers have had good month.  Spread trader Emil Van Essen Low Minimum program is up +2.05% est.  Ag trader Rosetta Capital Management is  up +1.20%.   Hog Spread trader NDX Shadrach is up +0.48% est., while NDX Abedengo is up +0.46% est.  Finally, short term index trader Paskewitz Asset Management Contrarian 3X Stock Index is up +1.73% est.

Trading Systems 

In a light trading week, day trading systems were mixed while swing trading programs were mostly lower.  Up until last week, swing programs had been consistently outpacing their day trading counterparts on a weekly basis but were overdue to mix things up.

Beginning with the day trading programs, Rayo Plus Dax was the top performer up +€580 for the week.  Next in line was Clipper ERL +$370 on a single trade from Tuesday, while PSI! ERL capitalized on a single trade on Thursday for +$250. Rounding out the aforementioned day trading programs were BetaCon 4/1 ESX -€170 and ATB TrendyBalance v2 Dax -€548.85.

Transitioning over the swing trading programs, there were some standout performances that were unfortunately overshadowed by some larger losses. Beginning with the positive performances, Waugh CTO ERL finished the week +$1,460 for the week. Other swing systems that were able to stay above water included Polaris ES +$757.50 and AG Mechwarrior ES +$597.50. In the interest rate sector, Jaws US 60 and US 400 were hard at work grinding out +$378.75 and +$688.75 respectively. On the losing side of the action, Ultramini ES lost -$480, BAM 90 ES Single Contract dropped -$1,480 and BAM 90 ES lost -$3,035.

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.