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System Spotlight: Delphi Forex EURUSD & Delphi Forex GBPUSD

May 8, 2006

With volatility in traditional swing markets like the e-mini SP slowing down in the last few years, both developers and traders have begun looking for new markets to trade their systems on. Many of those that are looking for volatility have turned their eye towards the foreign exchange markets (also known as FOREX, F/X, & Currency pairs) as a better trading option than the traditional stock futures markets that have seen volatility decrease since 2000.

While finding a better market to trade sounds like an easy solution for strategies that are struggling in stagnant market conditions, the reality is very few systems can be transferred from one sector to another without minor modification, and only the most robust strategies can adapt themselves to a market with entirely different dynamics.

However, Attain has found one of these rare adaptive strategies amongst our own group of systems and system developers. The strategy is a swing trading system named Delphi, written by Mr. Lincoln Fiske of TradingVisions systems in Spokane, Washington. We have done extensive testing on Delphi, and are now running Delphi F/X EURUSD on the Euro/Dollar cross currency pair, and Delphi F/X GBPUSD on the "cable spread" or British Pound/US Dollar exchange rate.

Who is the Developer?

The developer of the Delphi F/X system is Mr. Lincoln Fiske of TradingVisions Systems. Mr. Fiske is not a stranger to this newsletter or Attain Capital investors, with his very popular and successful Axiom eMD a favorite among many Attain clients. We have profiled and traded several of his trading systems over the years. - including Axiom Index, Impetus eRL, and Early Bird III - and are now happy to share our thoughts on Delphi F/X.

Lincoln was first "bit" by the investing bug during the early years of the mutual fund revolution, as he calls it (mid-60's). He was fascinated by the prospect of making money through wise investment decisions, and eventually found his way to futures and options in the late 1980's.

According to Lincoln, he tried any number of pools, CTAs, broker recommendations, hotlines, and systems, but in the end suffered dismal results. So in the mid-90s he started trying to develop his own approach and method of trading the futures markets.

Lincoln had this to say on those early forays into system development:
"I discovered the hard way that system development is a very difficult task. Or I should say.. Successful system development, because it's very easy to develop a system, but to have it actually make money is another matter. At one point I had put many hours into a system and was ready to trade it-I'd tested it over all of 6 months' data (which seemed like a lot, at the time), adding lots of rules to pump up the results, and felt confident I would soon be making lots of money, or at least making back some of my losses. Unsolicited, a trading friend sent me another 6 months of data, so I excitedly ran the system on it... and was horrified to see the poor results."

This experience taught Lincoln valuable lessons in how to test systems, and more importantly - how NOT to optimize them. Lincoln has been hard at work since that time, developing, testing, and trading systems which have had their ups and downs, but through it all held up relatively well. The result has been Trading Visions, Inc. (www.tradingvisions.com) - the company he owns and incorporated a few yeas ago.

How Does it Work?

One of the best attributes about Delphi F/X is that the strategy was not originally intended for the FOREX market. That may sound counter-intuitive, but as we pointed out in last week's newsletter - that insures the system was not curve fit for this market. Originally, Delphi was written to swing trade the e-mini Russell 2000 and SP Midcap 400 stock index futures markets on an intraday basis, with the expectation that it could be applied to other stock indexes or commodity markets if an investor desired more diversification.

Late in 2005, at the suggestion of Attain Capital, Mr. Fiske applied his Delphi strategy to the F/X markets to see if it was robust enough to take on a whole new market sector outside of Futures and Stocks. Not surprisingly, Delphi passed the test with flying colors without any modifications to the original system code, further proving how robust the strategy is.

Perhaps even more impressive is the fact that the original trading logic behind Delphi is actually based off a long term trading system. Many years ago when Mr. Fiske first began writing systems he came up with the idea for what has become the Axiom Long Term commodity trading system. However, due to the popularity of day trading systems at the time, Mr. Fiske put the Axiom project on hold and focused his attention on SP systems like Early Bird, Impetus, and Spectrum, along with Cobalt a NASDAQ day trading system.

During 2003 as the day trading bubble began to burst for many strategies Mr. Fiske returned to his roots and finished developing both the Axiom Long Term and Axiom Swing trading systems in hopes of diversifying his own trading portfolio. Later that same year both systems were released to the public and both are still being traded for clients today.

However, while watching Axiom Swing enjoy success in 2004 and 2005 Mr. Fiske realized that there was still room for improving the system and investigated replacing the generic static stop and profit target used in Axiom, with an adaptive ATR (Average True Range) based stop and profit target, which would allow the system to better adapt to changing market conditions in the stock index futures. The experiment was a success and the Delphi trading system was born in late 2005.

Please re-visit the November 15th 2005 Attain Alternatives newsletter for more information on the logic behind Delphi and Axiom at: http://www.attaincapital.com/alternatives/alt_nov1405.htm

Why FOREX?

Even though the F/X market is arguably the most liquid trading market it in the world, many system investors are still skeptical of becoming involved. Here are 5 reasons why Attain Capital has finally started executing F/X based systems:

Please note that Attain Capital only recommends trading the most liquid and popular currency pairs known as the six majors: The six majors are the exchange rates between the US Dollar and the following foreign currencies: European Currency (EURUSD), Australian Dollar (AUDUSD), Swiss Franc (USDCHF), Japanese Yen (USDJPY), British Pound (GBPUSD), and Canadian Dollar (USDCAD). Any other currency pairs should be considered exotic with the potential for very illiquid market conditions and very poor fills.

1. FX Market is Maturing:
When Attain Capital approached Mr. Fiske in late 2005 about applying his strategies towards the F/X markets, even he was surprised at potential interest in this type of system trading. For years, even the savviest of investors stayed away from F/X because of its reputation as a market dominated by huge banks and trouble accessing the market. Some of this reputation is due to the fact that there is not a central transparent exchange like the Chicago Mercantile Exchange to process and match customer trades. (The CME recently signed an agreement with Reuters to provide spot traded FX on their GLOBEX platform with trading estimated to begin in early 2007.) Rather, all FX trades are physically executed between individual banks that, in effect, set their own markets. The market has matured to a place where comparable exchange rates exist in real-time between all of the different dealers, because of the availability of quotes, and opportunity for arbitrage profits should the dealers stray too far from one another.

2. Quality and quantity of historical data has improved:
Most popular publicly available trading platforms now offer at least 3 years of F/X data to develop and test strategies on. Strategies can also be tested on the traditional currency futures markets which have 10+ years of data to view. (That's a good way to test the robustness of your system as well. Test your system on the currency future market of the pair you're looking at, and see how it compares)

3. 24 Hour Market allows investors to be invested and diversified around the clock:
One of the attractions to F/X is that unlike the US stock indices and futures markets which rely on US economic reports and earnings for movement, the F/X markets incorporate the economies of Europe, Asia, and Australia creating a true worldwide trading opportunity that is active around the clock.

4. No preset contract months and delivery:
Unlike futures which have contracts that expire every 3 months and force customers to roll. F/X contracts never need to roll and you can hold them for as long as you like. This also eliminates the need for back adjusted data, which is a major reason why system developers are attracted to F/X.

Contracts do expire (for a lack of a better term) behind the scenes on a daily basis but are simultaneously closed out and reopened and no action is required by the investor. The other main difference is that depending on whether you are long or short interest is also added or taken away from your account on a nightly basis. For system traders the amount of interest gained or lost should roughly zero out each as most systems take an equal amount of long and short positions. Call us for more information on either of these more advanced F/X characteristics.

5. Perfect Money Management Capabilities:
One of the truly unique and most attractive qualities about F/X is the ability to trade nearly any contract size you want. In fact, you can make your own size. The standard retail full size F/X contract is worth $100k ($10 per PIP) with the standard mini being worth $10k. But let us say you want would rather trade an amount in between $10k and $100k can this be done? In a word - yes. In fact you can decide the EXACT amount you would like to trade on any specific trade. If you prefer to trade $15k lot sizes that can be done, so can $17k, 54k, and any other number one can think of.

How does this work? Well, first it is important to remember that F/X is a cash based market and there are no predetermined lot sizes per say. If you had 37,200 Euro Currency you wanted to exchange for US dollars, would your bank say NO, of course not. The predetermined $100K and $10K lot sizes are a convenience the retail F/X dealers have built into their systems to facilitate matching their clients orders with one another. They don't want to have to "find a home" for an extra 17,500 Euro. If you trade an F/X system with Attain Capital, your trades are routed through an Institutional Trading Desk who allows us to specify any trading size we like. So, very specific and detailed money management is possible.

Some brokers have taken this innate ability in F/X trading to do "odd sizes" as a special feature they offer, and are touting the ability to do "Commodity pool like" percentage allocations to different accounts. This is just a fancy way of saying that a customer wanting to do 17,500 Euro is doing 17.5% of a 100,000 order. Seems like common sense to us, but some brokers are claming the ability to do percentage breakdowns as a unique service they offer to unknowing customers as a way to drum up business. Basically, these unscrupulous brokers are relying on customers only to be familiar with the standard $10k or $100k trading size and are hoping to charge a larger market spread because of this, but now you know better so don’t be fooled!

Attain Comments:

While Attain has been a trailblazer of sorts for system trading the F/X markets, there are still some risks associated with this type of trading. First, it is worth noting that there is only a limited amount of data to test systems on and investors should be extra diligent when researching potential trading opportunities. Second, many F/X systems are literally brand new, without any actual trading history and very limited backtesting.

It is because of these factors and other inconsistencies that Attain reached out to a familiar friend in Mr. Fiske when researching F/X trading opportunities for our customers. We know Lincoln as an honest system developer and if anyone’s system has a shot in succeeding at trading the volatile F/X markets, we believe it is his. This is why we recommended that he apply his strategies to the FX markets, and why we are now sharing the strategies with you.

It was also encouraging that the Delphi strategy that has worked so well on the stock index futures market, back tested so well on the F/X markets. Past performance does not ensure future results, of course, but it is encouraging to know that Delphi F/X has not been curve fit to the F/X markets like many other strategies available to the public. In fact, we know there is no chance it was, because it was developed on other markets.

Complete stats including returns and draw downs can be found in the charts below. Please note that Attain is using a 10 PIP spread or $100 per round turn for slippage and commission. While our actual spreads are much less than 10 PIPS, we feel it is important to inflate the amount of costs associated with each trade as a way of stress testing a system. Especially F/X systems that are operating on limited track records.

- John Cummings

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.

Feature | Week In Review | Chart of the Week |

Chart of the Week : Trend Simplicity Copper Trade

Feature | Week In Review | Chart of the Week |

The Week in Review: Energies Ease Off As The Bull Market In Metals Heats Up

***Overview***

The U.S. Dollar continued its slide against the major foreign currencies last week, much to the delight of several long term trend following systems, with the benchmark Dollar Index contract falling 1.35 % for the week. The British Pound tacked on the largest gains by rising 2.06 % against the Dollar up for the week. The Swiss Franc, Japanese Yen, Canadian Dollar and Euro were all up more modestly between .90 % and 1.25 %.

Metals markets perked up again last week with Copper, Gold and Silver all making new recent highs. Copper saw the biggest gains up 8.48 %, Gold up 4.55 % or nearly $30/oz and Silver up 1.91 %. Metals seem to be past due for some type of correction in the short term, but it’s hard to find speculators that want to be caught short in this bull market.

Energy prices headed lower as reports released on Wednesday and Thursday showed a build in supplies. Crude Oil fell just 2.35 % for the week but was down 6 % off the highs made earlier in the week. Heating Oil and Unleaded Gas were down 2.82 % and 2.33 % for the week respectively. Natural Gas prices rallied last week off the recent lows gaining 3.35 % for the week and has been uncorrelated to other energies over the past few months.

***Day Trading***

Day trading systems fared well again last week with foreign systems leading the way thanks to some increased volatility in stock indices overseas. The top four performers for the week all trade the German Dax market which is traded on Eurex. Phi Plus Dax was the top performing system last week with profits of +$2,540 on three trades. Theta Dax was right on its heels with gains of +$1,987.67. Rayo Plus and Beta V2 came in just behind with profits of +$1,787.07 and +$1,552.49 respectively. All of the Dax systems saw the majority of these gains from trades on Wednesday when the U.S. stock market was relatively unchanged for the day.

Domestically, systems were less active but still managed to put some nice trades together. Compass SP had one short trade from Monday for a profit of +$1,425 (+$310 per ES). SPmd had three trades last week for a total gain of +$1,412.50. RC Success eRL, eMD and ES all came out of the week on top. Gains were +$1,394, +$880 and +$760 per contract respectively. R-Mesa SP had two trades for a small gain of +$475. Beta Con 4/1 Dax and Beta Con 4/1 ESX didn’t have the big gains on Wednesday like the other foreign programs and finished the week with profits of just +$307.45 and +$66.38 a piece.

On the other side of the coin, Impetus finished the week just under break-even with a small loss of -$13.40. Compass eRL underperformed compared to the SP system with a loss of -$245 on two trades. RC Miracles eMD lost -$440 on three trades. Kappa Dax lost -$497.02 for the week. Epsilon 12/12 Bund had three trades that lost -$516.83. R-Mesa eRL also had three trades for a loss of -$1,000. Finally, Tanker CL had trouble navigating the choppy conditions in the energy markets and went long on both trades only to be stopped out of both.

***Swing Trading***

Swing traders were sluggish to start the month with only a handful of winning trades.

The trade of the week was outside of the stock market but rather in the bond market which is prone to exciting trading conditions prior to the first Friday of every month when US Unemployment figures are released – This week Jaws Narrowneck bonds ended with a total gain of +$1,150 across the 2 timeframes traded (60 minute and Daily). Other profitable bond trading included a gain of +$200 per contract from Gettess Bonds on one trade.

In the index markets - times were lean as the markets sold off quickly to start the week followed by solid rally into the end of the week. This type of trading can often elect intermediate term systems short only to force a long reversal for a loss later in the week... and this was exactly the case with only a small handful of systems turning a profit for the week – Hourly eRL ended +$1,021.26 for the week on 2 long trades, Axiom eMD added +$780, Axiom eRL was up +$770 by the weekend, and Pivots weekly NQ gained +$185.

Those systems that were caught with losses on the week included Delphi eRL -$1,576.70, Tzar eRL -$1,460, Eclipse eRL -$1,310, Tzar eMD -$1,240, Delphi eMD -$1,130, Targets eRL -$1,103.13, Ping portfolio -$770, Tzar ES -$4650, Seasonal ES -$547.50, Tzar NQ -$185, and small losses from SeasonalST eRL, Axiom NQ, and Axiom ES.

Finally Forex trading slowed down after the prior weeks big run – Hurricane FX GBP ended down -$490 and SC Forex GBP lost -$710.

***Long Term***

Most trend following systems have entered long in some combination of foreign currencies or short the Dollar Index and last week’s movement further benefited those open positions. All amounts listed below are open trade equity as of Friday’s close.

As previously mentioned, the British Pound tacked on the biggest gains against the Dollar last week. Systems holding long in the Pound include Checkmate (+$4,562.50), Fusion (+$5,337.50) and Interplay (+$5,325).

Systems holding long in the Swiss Franc include Brix (+$4,450), Synergy (+$3,787), Andromeda (+$3,412.50), Pegasus (+$3,662.50) and Axiom LT (+$3,637.50).

In the Yen, systems holding long include Brix (+$2,175), Checkmate (+$1,712.50), Fusion (+$2,300), Synergy (+$2,262.50), Andromeda (+$1,762.50), Pegasus (+$1,712.50) and Axiom LT (+$612.50).

Systems holding short in the Dollar Index include Aberration (+$2,850), Andromeda (+$2,790), SEMA4 Symmetry (+$680) and Axiom LT (+$3,440).

System exits include Aberration and Andromeda which were stopped out of long Corn positions for losses of -$737.50 and -$587.50 respectively. Axiom LT exited its long Crude Oil position for a total gain of +$2,320 (loss of -$330 on the current leg of the trade).

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Feature | Week In Review | Chart of the Week |