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System Spotlight: Aberration, Aberration Plus

February 14, 2005

 

It is one of the most widely known systems of all time, and because of that is often overlooked and ignored as an old, boring system. Well, if old and boring means having made more money than most in two out of the last three years, and the best performing trend following system at Attain in 2004, maybe that's not such a bad place to be.

This month' s system spotlight highlights the system that started it all, the system that has been trading in real time, in actual accounts around the world for nearly 20 years, the system that defines trend following. This month's system spotlight is on that venerable old timer...Aberration.

Who is the Developer:

Keith Fitschen of Trade System, Inc. first developed Aberration in 1986 after serving over 20 years in the U.S. Air Force. He has a masters degree in electrical engineering and stochastic estimation, in addition to military work developing guidance systems for tactical air-launched weapons. His development of acoustic tracking systems in connection with such projects led to his expertise in examining time-series data.

"I knew that the markets, both stock and commodity, were noisy time-series data and I knew from my engineering background how to characterize and analyze that type of data. I started with commodities because they were more highly leverageable and because everyone seemed to be afraid of them (which equaled) opportunity" Keith says.

Beyond Aberration , Keith and Trade System, Inc. have developed and marketed other popular systems such as I-Master, B-Master, Double Play, and Aztec. Both I-Master and Aztec are executed for clients at Attain.

How Does it Work?

Aberration is a long term system that trades each commodity 3 to 4 times per year and is in each market about 60% of the time. It takes a passive approach, looking to participate in any given commodity's long term trend. It enters and exits positions at each market's open, and uses a volatility based protective stop.

Aberration is a fully disclosed system and relatively straight forward. It attempts to capture long term market trends by entering the market when prices signal an "Aberration". The system will bracket different markets by computing trading bands which contain over 95% or 1 standard deviation, of a particular market's price action for the past 80 days. Once the market price has risen above one of these bands, the system will enter long (BUY). Conversely, once the market's price has fallen below one of these bands, the system will go short (SELL).

Such "Aberrations" in a commodity's price can be few and far between in any one market, thus the program scans the data of the multiple markets looking for trading opportunities. The systems exposure to all eight of the commodity groups allows potential for profits from the moving group to make up for the losses in other groups. In the course of a year, one or more commodities in each group may make a big move.

All of Attain Capital's clients are now switched over to the Aberration Plus version of Aberration, which uses time based stops in an attempt to lock in more open trade profits. Aberration Plus is designed to provide a little smoother equity curve than the original Aberration.

For investors that are lacking sufficient capital to trade the full global portfolios, the developer has complied different portfolios for different initial capital levels.

• Starter Portfolio: 8 Commodities, $30,000
• Mid Size Portfolio: 14 Commodities, $50,000
• Full Size Portfolio: 21 Commodities, $100,000
• Global Portfolio: 33 Commodities, $200,000 and above

Attain Comments:

The mere fact that Aberration has been trading in real time for close to 20 years, (it was first released in 1986), is so impressive as to warrant your immediate respect. However, it has not been 20 years of bliss for those involved. I doubt very much there is anyone, save Mr. Fitschen himself who has been trading the system that entire time.

The reasons Aberration has seen its fair share of turnover are that the system has seen significant drawdown periods, and that most investors start trading the system with unrealistic expectations. The combination of these two factors leads to a sort of purging of Aberration followers each time the system has a drawdown. The drawdowns are just small enough (that is not so large as to drive every investor using the system out) and the people remaining on the system just large enough(just enough capital to keep trading) that Aberration keeps chugging along.

Aberration and Keith Fitschen are to trading system developers what Southwest is to airlines. Before Aberration, there simply wasn't a market for third party trading systems or firms like Attain to research and execute those systems for investors. He took an idea, and instead of trying to make a living trading that idea (although he does trade the system himself), made a living selling the idea. This has led to much controversy to be sure. Chief among them is the old question of why would you sell a system if you could trade your way to riches.

The simple answer Mr. Fitschen would probably give you is that its not so easy to trade your way to riches - even with a solid system. What do you do in the down years, for example; stop eating and paying the mortgage. Mr. Fitschen understood this, and didn't quit his day job of selling systems even while looking to them to produce investment returns.

Moving forward, Aberration continues to be a fine choice for any investor looking to gain exposure to trend following. We liken it most to an index tracking fund such as the QQQs, which will closely mirror the performance of the Nasdaq index. In the case of Aberration, an investment in that system will be like investing in a trend following index tracking stock, which will do quite well when global markets are trending, and do poorly when they are not.

- Jeff Eizenberg