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Trading System Spotlight: TurningPoint emini S&P

June 28, 2010


With the initial statements out of the G20 conference in Toronto this weekend failing to ease anyone’s fears of a double dip recession – the specter of more volatility on the road ahead appears very real.  But there are also improving corporate earnings, the absence of inflation, and improving consumer balance sheets to consider – making the argument that the worst is behind us.

Which side should you believe?  We tend to think there is more trouble on the horizon, thus think having long volatility exposure in your portfolio makes a lot of sense. But we’re also only about 65% convinced of that – meaning it pays to have some long volatility exposure that won’t do terribly if that doesn’t come to pass.

Stock index trading systems are the poster children for long volatility plays, given their fixed risks and propensity for letting profits run – and a new system to Attain in 2010, TurningPoint ES, has all of those long volatility features.  But the reason we chose the system to highlight this week is that we also like its ability to not trade for months at a time, which can protect it from a declining/low volatility environment. 

Who is the Developer?

The Developer of TurningPoint ES and TurningPoint X2 ES is Jeff Pilsmaker of Pilsmaker Trading Systems.  You might remember Mr. Pilsmaker from our August 2009 System Spotlight that highlighted his day trading system Upper Hand ES. 

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 twenty 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. Pilsmaker’s early forays into futures markets and systematic trading did not prove as successful 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 family.  When he is 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:

TurningPoint X2 ES and TurningPoint ES are short term swing trading strategies for trading the e-mini SP 500 futures market.  However, unlike many swing trading systems that have a countertrend bias, TurningPoint trades both against and with market momentum.  Which direction the system trades is not simply of a reflection of market activity, but also the strength of the market internals.  Therefore, the system can trade both with and against the short-term trend in the marketplace.  In addition, the system will often trade with the macro market trend and use short-term dips or rallies as entry opportunities to join the overall trend.  Unlike many swing trading systems that are in the market nearly 100% of the time, these systems will often only trade 20 to 25 times per year and can be flat for months at a time if market conditions do not warrant a trade.  This selectivity allows the system to avoid the chop factor that plagues so many swing systems.

The TurningPoint systems mix short-term trend following strategies with countertrend trades from time-to-time for good measure.  For the short-term trend following trades, the system will trade in the same direction as strong market trends, but will only enter in the direction of the trend after there has been a significant pull back in the market on an end of day basis.  While a trend following component is present - the system does not use a classic trend following ‘breakout’ method, instead choosing to measure the internal strength of the market to target an entry level at more advantageous prices. 

For example, one recent trade for this strategy was the day of the now infamous “flash crash”.  Traders should remember that in the days, weeks, and months leading up to the flash crash; the market saw a slow and consistent rally in which the S&P climbed approximately 16.50% in just over 11 weeks of trading.  This slow and consistent crawl was a thorn in the side of many systematic traders who kept on predicting that the market had to reverse lower at some point, and eventually the day of reckoning came as the combination of the European Debt Crisis and the failure of circuit breakers on the various American stock exchanges sent S&P futures plummeting (the market fell ~9% in just a few hours).  This sell off into market strength, and bounce off the lows on that day, triggered a buy order for Turning Point on the May 6th close to get in line with the overall up trend.

To recap the conditions for this trade: (past performance is not indicative of future results)

- Upward stock market trend of approximately 17% over 11 weeks

- Followed by a 8 day pull back that climaxed on May 6th, 2010

- Long entry by TurningPoint at 1124.25 after the May 6 market close

- Trade Exited on May 10, 2010 at 1152.25.00 on May 10 for a profit of $1400.00

This trade, while a little nerve wracking to be going long just hours after the flash crash, is the exact type of scenario that this strategy is designed to capture.  Granted, not every trade will have the excitement of what we saw back on May 6, but it is a good example of how the system operates; identifying an overall trend, waiting for a pullback – then strength off of that pullback to get in line with the overall trend at better prices.

As mentioned, not all trades try to get in line with the trend, with the system actually using counter-trend logic from time to time. For counter-trend type trades the system will look to capitalize on potential market reversals, or turning points, that occur while the system is in an open position.  For example, if the system was long and the e-mini SP 500 market began to falter, the strategies counter-trend attributes would begin to kick in to determine whether the move in the opposite direction was a true market reversal or just a temporary pull back in the current market trend.  If a reversal is signaled, the system will look to switch its position from long to short (or short to long if the system enters the day short).

The key to the Turning Point logic is in how it analyzes market moves to see if they are true turning points, or just pauses and pullbacks from an overall trend which will continue.  To help with this analysis, the developer uses proprietary indicators to detect waning momentum in the emini S&P futures.  These indicators focus on price and overall market conditions such as volume, and measure the correlation between the current price and the overall market conditions to gauge whether market momentum is continuing or waning.

In addition to the proprietary indicators, Mr. Pilsmaker also uses the $TRIN as a proxy to gauge the overall condition of the market.  The $TRIN is a short–term indicator that measures on volume market breadth and can be calculated as follows:

(advancing issues/declining issues)

TRIN =             ---------------------------------------------------------------

(volume of advancing issues)/ volume of declining issues)

When the system sees a drop in correlation between the $TRIN and market price, it views that as a sign that the market is ready for a move in the opposite direction of the current market direction.  Most of the time this divergence is strong enough to initiate a trade by itself; however, the system will look for confirmation from the closing price to determine if a trade is to be initiated that day.

For those following closely, you will note that we have been talking about two systems in this spotlight: TurningPoint ES and TurningPoint X2 ES.  The only difference between these two systems is that the X2 version adds a layer of money management in which it will trade an additional contract after a series of losing trades.  When back tested over an 8+ year period, Pilsmaker found that the majority of losing trades are followed by a winning trade (~69% of the time), thus TurningPoint X2 attempts to capitalize on that by effectively ‘doubling up” after a losing trade. It does require slightly more margin, but back testing has shown that drawdown is not significantly impacted.  [Disclaimer: back testing is hypothetical in nature – see disclaimer below]

Trades can be exited in one of four ways; by hitting a profit target, hitting a breakeven amount, triggering a stop loss, or by detecting waning momentum.  Additionally, as mentioned above, the system can take a trade in the opposite direction when exiting a position on waning momentum if certain criteria (once again tied to going from strongly correlated to weakly correlated) are satisfied.

Finally, the system treats the long and short sides differently in terms of the stop loss and profit target amounts – based on the developer’s belief that markets move much more easily to the down side. Long positions have a smaller profit target of $1500 due to the choppiness inherent in most up moves.  A wider initial stop of $3100 on the long position also helps with the more choppy nature of up moves.  Short positions have a smaller stop loss of $2700 and breakeven amount but a much larger profit target of $9000.  [Please note that stop orders cannot guarantee that an order will be filled at the desired price] 

Attain Comments:

TurningPoint and TurningPoint X2 are new systems at Attain in 2010.  They were officially released by the developer for testing in November of last year and began trading for clients in February of this past year.  Thus far, the system has been successful in real time, and has it has been at the top of our 90 day performance rankings based on return and drawdown over the past few months.  The system has had 3 winning trades and 1 loss in the last 4 months, however some of its success can be attributed to just staying out of the market between February and May when many other stock index systems were chopped up in the  stock markets slow, but gradual climb. 

To this point, the strategy has been very selective in its trades, as it has only traded 4 times in the last four months.  This is much less than the system would normally trade, on average; and clients of these systems should expect to see 20-25 trades per year.  In a perfect world,  the system would be slightly more dynamic and not require as large a shift in correlation between the market and $TRIN to initiate a trade, but one of the fatal flaws of swing trading systems can be their getting ‘stuck’ in choppy market conditions buying tops and selling bottoms.  Most find themselves trading too much during such times, so a system that trades less often is a welcome change.

The other attribute worth noting is the trading of the additional contract in the X2 version of the system.  The back testing has demonstrated that this extra filter adds another layer of profitability to the system.  However, since systems are prone to becoming less efficient over time there is the possibility the number of losing trades will increase significantly, and, likewise increase the number of times the second contract filter kicks in.  While, it is within reason to expect the filter to continue to provide added value down the road, there is also a strong possibility that the system will be trading 2 contracts more often, and therefore increasing risk per trade.

Overall, we have been impressed with the TurningPoint systems to this point. They are long volatility systems which are designed to do well when there are extended moves (1 to 2 days) in one direction or the other, but their selectivity makes for a nice hedge in case the recent spike in volatility doesn’t persist. 

Given the relatively low risk per trade, low minimum investment, and lower than normal trading volume, TurningPoint is a nice ‘long volatility’ addition (with a nice hedge against volatility not rising in its trade selectivity) to a portfolio as a hedge against whatever is coming next out of Wall Street, Europe, or elsewhere. 

- John Cummings


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Feature | Week In Review: Soft Commodities Soar while Stocks and Energies struggle | Chart of the Week

The week started off with a bang on Chinese news that they would take a more flexible stance on their Yuan policy – pushing global markets up 2% or so. But as the hours passed by on Monday, pessimism crept back into some sectors and gains were limited – based in part on beliefs that the Yuan appreciation would drastically cut price margins on lower cost products. The second major news event of the week was the announcement from the 2-day FOMC meeting in which the FED indicated pockets of weakness remain in the U.S. economy along with worries that Europe’s debt problems could lead to more volatility in the financial markets. The stock index sector was very sensitive to both events as the NASDAQ futures -3.68% led the move lower followed by S&P500 futures -3.20%, Mid-Cap 400 futures -3.06%, Russell 2000 futures -3.00% and Dow futures -2.59%.

Commodity and food products were keen to the Chinese news in some sectors, especially the raw varieties with Sugar +6.57%, Cocoa +5.46%, Coffee +4.49% and Cotton +2.10%. Livestock was a benefactor of favorable foreign demand as Lean Hogs +1.51% and Live Cattle finished the week with a decent rally. The grain sector succumbed to near perfect growing conditions in the U.S. which is expected to bolster record production. For the week Corn -5.26% led the way lower followed by Wheat -2.20% and Soybeans -0.42%.

The energy complex ended in a mixed fashion as some products were hampered by heavier than expected weekly supplies, while forecasts for the first developed hurricane in the Gulf of Mexico sparked underlying support. Heating Oil -1.29% and Natural Gas -0.04% slipped while RBOB Gasoline futures +0.98% and Crude Oil futures +0.77% appreciated slightly. 

The balance of the metals experienced weakness during the past week on ideas that the new currency policy by China could make imports of metals more expensive if the Yuan appreciated too swiftly. The worries led Palladium to dip -3.54% followed by Platinum -1.55%, Silver -0.68% and Gold -0.14%. Copper +7.07% posted the largest weekly increase since early February supported by news of a possible global stocks deficit due to a report showing year vs. year mining production steady from the previous year..      

Currencies futures featured position squaring ahead of the G-20 meetings along with ideas that China’s policy change of managing the Yuan could hamper the weaker growing U.S. and European economies. The worries led to appreciation in Japanese Yen +1.68%, British Pound +1.59% and Swiss Franc+1.51%. The U.S. Dollar Index finished -0.47% and the Euro ended-0.18%.       

The Interest Rate sector gained traction from the FOMC statement along with news late in the week of a weaker than estimated U.S. GDP rate. U.S. 30-Year Bond futures rallied +1.47% while 10-Year Notes futures ended the week +0.84%. 

Managed Futures

After a mixed May and slow start to June, Option Trading managers are shaping up to end June generally ahead.  Leading the way has been ACE DCP which is currently ahead an estimated +11.29% after finishing May down an estimated -12.43%.  Other Option Trading estimates are as follows: ACE SIPC +2.75%, Cervino Diversified Options  +0.94%, Cervino Diversified 2x +2.01%, Clarity Capital +4.39%, Crescent Bay PSI +1.70%, Crescent Bay BVP +8.96%, FCI OSS +2.32%, FCI CPP -0.76%, HB Capital +0.45%, Kingsview Management -0.10%, and Liberty Funds Diversified Options -1.57%.

Specialty market managers have been lead by agriculture trader Oak Investment Group who is ahead an estimated +5.72% followed by 2100 Xenon Fixed Income Program which is ahead +0.37%.  Elsewhere, other agriculture trading managers NDX Abednego, NDX Shadrach, and Rosetta Capital  are down -0.33%, -0.51%, and -1.80% respectively.  Spread Trading manager Emil Van Essen Low Minimum Program is down -2.85%.

Multi-market CTA’s continue to post mixed performance in June.  Leading the way is Dighton Capital USA Aggressive Futures Trading at +19.67% who are living up to their name after posting big gains this month.   Dighton is a discretionary trader who typically likes to buy value trades in the softs (Coffee, Sugar, Cocoa, Cotton) and that strategy has paid off handsomely this month with coffee futures skyrocketing.  The top systematic program thus far has been Accela Capital Management Global Diversified at +3.76%.

Other managers in the black thus far include Auctos Capital Management Global Diversified +3.54%, APA Modified +2.72%, GT Capital +1.21%, Covenant Capital Aggressive +1.10%, Applied Capital Systems +0.88%, Clarke Global Basic +0.71%, Clarke Global Magnum +0.18%, and Mesirow Financial Commodities Absolute Return +0.16%.

There is a solid group of managers in the red as well including Mesirow Financial Commodities Low Volatility -0.05%,  Futures Truth MS4 -0.32%, DMH -0.52%, Clarke Capital Worldwide -0.90%, Dominion Capital Management Sapphire -1.41%, Sequential Capital Management -1.51%, 2100 Xenon Managed Futures (2X) -1.55%,  Integrated Managed Futures Global Concentrated -1.75%, Hoffman Asset Management -2.18%, Futures Truth SAM 101 -2.41%, Robinson Langley Capital -3.68%, and Quantum Leap Capital -4.57%.

Short term traders continued their month long comeback last week.  Paskewitz Asset Management Contrarian 3X Stock Index is up +4.70% est., while Roe Capital Management Jefferson is up +4.66%.

Trading Systems

Last week was a rough week for the trading system. Many of the trading systems were caught long in the equity markets which unfortunately for the systems were heading downwards.

There were a few bright spots amongst the day trading systems. Compass SP led the way with a gain of $2,209.27. Compass SP made all of its profit early on in the week particularly on a short trade on Tuesday. On Tuesday, Compass SP got short about an hour before the close and benefited from the 4 point drop in the S&P 500 market during the last hour.  Other positive results for the week were Clipper eRL at $143.92, Upper Hand ES at $207.5, Compass ES at $535.00, and Waugh eRL at $860.00.

The major move in the equity markets last week was a downtrend. Unfortunately a few of the trading systems got caught long during the down move or entered the down move too late and got hurt on the bounce. This was the case with ViperIIA EMD, throughout the week ViperIIA EMD got caught long or got short near the lows – resulting in losses of -$611. Other results were BounceMOC eRL at -$140.00, BounceMOC EMD at -$240.00, Balance Point ES at -$360.00, EVP 1 US at -$373.75, ATB TrendyBalance v2 DAX at -$420.00, , ATB TrendyBalance v3 DAX at -$767.50, Rayo Plus DAX at -$1,092.50, and Sita ES at -$1,515.00.

Amongst the swing trading systems Strategic US led the way. Strategic US got long 30 yr bonds early on Monday and took profits early on Tuesday. Then Strategic US got long again later in the day on Tuesday and continued to ride the rally in the bond market for a profit of $2,065.00. Money Beans S also had a good week getting short near the highs of each move and rode the move down and produced a result of $778.93. Other positive results were MoneyMaker ES at $432.50, and Bounce eRL at $70.00.

The rest of the swing systems had a pretty rough go of it last week. Strategic SP started off well by getting short. But then on Tuesday it reversed and got long. Unfortunately the market fell nearly 20 points from that price and consequently Strategic SP lost -$4,125.00. Other negative results were Bounce EMD at -$255.00, AG Mechwarrior ES at -$285.00, Strategic NQ at -$725.00, Strategic ES at -$822.50, Waugh CTO eRL at -$1,330.00, Strategic EMD at -$2,285.00, Bam 90 ES at -$2,335.00, and  Strategic eRL at -$2,992.50.

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.