Monthly System Spotlight: Bounce Day & Swing Trading Systems
January 17, 2006
After last week's newsletter showing the "Top Fifteen" systems at Attain as ranked across eight different statistical categories, several calls and emails came in asking for more information on the funny sounding systems sitting at rankings 9 and 10. Bounce eRL and Bounce eRL Swing. So, What is "Bounce?", "Who is Bounce?" "How high can it Bounce?"
Well - we're glad you asked. The Bounce suite of systems include two day trading and two swing trading systems that operate on the e-mini Russell 2000 and e-mini S&P Mid Cap markets. And the unique thing about them is that they trade the long side of the market only. Attain is usually not a proponent of systems which employ different logic for long and short trades, and we didn't know what to think of a system on the long side only. But it has been a year since live trading began - and the results have been encouraging enough to spotlight the system this month.
Who is the Developer?
The developer of the Bounce suite of day and swing trading systems is one of the more uniquely named system developers - TradeMaid Systems. TradeMaid is owned and operated by New Zealander Peter Zwag, a long time client and acquaintance of Attain.
Peter's technical and programming background stems from his pre-developer career maintaining high end computer servers for IBM and later Compaq. Like many system developers we run across, the lure of trading for a living and working on his own terms finally got the better of him, and in 1990 Mr. Zwag quit the "real world" to become a full time trading system developer.
According to Mr. Zwag - he "went through all the learning curves that idealistic traders go through", including searching for a holy grail system, optimizing results on single markets instead of across a broad set of markets, and being too reliant on volatility. His conclusion: "that trading systems robustness is related to large sample size in both time and frequency of trades." More recently, Peter found that the drastically reduced S&P 500 volatility had been reduced so much that it was at the "point of being very costly to trade".
Peter now lives in Australia and works full time as a trading system developer.
How Does the System Work?
Just like its name alludes to - each of the Bounce systems looks for, you guessed it; a market bounce. A bounce is in its simplest form a rally in prices after a sharp downturn or extended sell off. We hear a lot about "dead cat bounces", which usually occur after a very dramatic sell off following a Fed meeting or surprise earnings report, but there can be significant "bounces" to the upside without such a significant move to the downside.
Bounce is a low sizzle, robust system whose entry technique has not changed for "nearly 3 years" according to the developer. The system was designed for the stock index markets, which tend to see more "bounce" behavior than traditional commodity markets because of the preprogrammed buying of mutual funds, retirement accounts, pension funds, etc. However, because of the historically low volatility in the S&P 500 futures market - the system is run on the more volatile e-mini Russell 2000 and e-mini S&P Mid Cap markets.
The entry technique for the Bounce systems is the same across both the day and swing trading systems. It constantly scans the market for price patterns that represent a market that is in a sharp unsustainable downwards decline. Once this decline is identified - the system will look for a short turn, or "bounce", upwards. Once this confirmation signal is given, the system will enter long and ride the "bounce", trailing its stop when and if prices increase.
The exit techniques for the day and swing trading systems vary in one significant way. The day trading Bounce eRL and bounce eMD trail their stops intraday and then exit on the close of the market if the stop has not been hit; while Bounce eRL Swing and Bounce eMD Swing will trail the same stop - but don't mind holding the position overnight in hopes of a continuation rally into the next day. Because of the identical entry technique and similar exit technique - both the day and swing trading systems can see the same result in the same market some days when the trailing stop is triggered.
Because of its testing on a sample of 2800 trades over 22 years of data, the developer is confident in the system's logic; stating "This testing allowed me to get a robust entry technique that I was sure was statically valid." The testing of the strategy was performed on multiple types of data, with no changes in parameters to the strategy; and showed adequate performance across the spectrum of markets - even in Japanese Azuki red kidney beans!
Because of its profile of buying after sharp sell offs, Bounce is skewed towards better performance in bear markets in both the day and swing trading versions. When the stock market is rallying, the filters and triggers that scan for a sharp downmove will cause the systems to "go to sleep" for a few months at time.
Attain Comments
The Bounce day and swing trading systems on the eMD and eRL are unique in their strategy to only take long trades, while avoiding the short side of the market all together. And while that usually brings the dreaded "curve-fit" word to mind, the Bounce systems are choosing the long side because of the underlying assumption behind the logic, NOT because it performs better or smoothes out the equity curve. If you believe the market tends to "bounce" of lows and base your entire logic off that premise - it doesn't make a lot of sense to have short side trades also. That's simply not part of the assumptions behind the logic.
So, the strategy does appear sound, with several nice trades in 2005 and early this year to back that up. But the system has also been hindered by the lack of movement in the stock index markets for most of the past two years. There have simply not been enough large downward moves to help trigger this strategy into the market, and the track records show how the system can be dormant for long periods of time. This can help prevent losses, but is not much consolation to investors who are paying monthly lease fees.
This system could be a fit for that rarest of trading system investor - the one who is more interested in performance than daily action. Add to that the very real possibility of the Russell 2000 and S&P MidCap seeing some big downward corrections this year after posting new all time highs last year - and the Bounce systems could be right back in the Top Fifteen this time next year.
- Walter Gallwas
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 |
Feature | Week In Review | Chart of the Week |
Last week was a very slow week of trading for the US Stock and Financial markets. Stock Index futures, Bond futures, and Currency futures all took a breather as traders continue to look for signs of improvement or trouble in the US Economy.
In the stock indices, both SP and Midcap 400 futures remained nearly unchanged for the week , while the more tech laden NASDAQ futures and Russell 2000 futures rallied slightly with NASDAQ futures gaining +0.60% and Russell futures rising +1.09%.
Bonds were even slower than stocks which isn’t too surprising considering that lack luster market conditions have dominated the bond markets for some time now. Both 30 year bonds and 10 year notes were nearly unchanged for the week. It was the same situation in the foreign currencies with only Swiss Franc futures (-0.65%) showing any signs of life.
Commodities were a different story, however; as energies, metals, softs, and grains all enjoyed big moves last week. Energies sold off as temperatures remained elevated across the US, with Natural Gas futures ending the week down -8.31%, followed by both Heating Oil and Unleaded Gas futures - which both dropped -4.65%. A late week rally prevented Crude Oil futures (-0.55%) from dropping too far.
Metals moved in the opposite direction — as Gold prices continue to be a hot topic of discussion. The precious metal set another recent market high last week after gaining +2.92% as gold prices reached their highest level since the early ‘80’s. The other metals markets followed suit with Platinum futures gaining +3.88%, Palladium futures were up +3.82%, and High Grade Copper futures rallying +1.27% higher to set their own all time highs.
In the tropical, or soft, markets: Sugar futures continue to rally higher week after week due to its use in ethanol production. Sugar gained +2.62% last week and is already up +4.02% for the year. Cotton was up as well last week gaining +1.60% while Coffee remained unchanged for the week.
Finally, grain prices moved lower with Soybeans falling -5.65% and Wheat dropping -1.21%. Corn was unchanged for the week.
***Day Trading***
Last week saw typical results for day trading systems ahead of a holiday weekend. Volume was extremely light and although the trend was slightly bearish, the S&Ps traded in a mere thirteen point range. The results were similarly lackluster; with no systems gaining or losing any significant equity for the week.
RC Success eRL has started the year off on a positive note and was able to profit another +$265 for the week. Clipper eRL traded three times last week for a small loss of -$10 per contract, while the Electric Daybreaker II portfolio (ES, NQ and eRL) also had small losses totaling -$360 per contract for the system.
RC Success ES did not have the favorable results of sister system RC Success eRL, unfortunately, losing -$172.50 for the week. Daybreaker SP had both a short and long trade in that order that lost -$450 total. R-Mesa SP had a trio of trades that lost -$700 for the week. Finally, Compass SP traded four out of five trading days for a loss of -$900.30 for the week.
***Swing Trading***
The continued upward movement in Stocks, Bonds, and Crude Oil resulted in a net positive week for swing systems.
There were several impressive trades last week. Starting in the Stock Indices, Delphi eRL hit a profit target Monday for a gain of +$2,090 per contract. Further, in the Bonds - Jaws Narrowneck jumped in the bond market on the long side Thursday to end the week with open trade gains of +$1,218.75 per contract. Finally, in the Crude Axiom CL 90 and 135 continued to hold long the market despite a correction early in the week and were holding on to gains of +$1,530 and +$1,580 respectively heading into today…(CL was up $2.37 today to $66.95 in the March contract)
In other trading a majority of stock index systems headed into the weekend long; however not all were profitable. The systems holding onto open trade profits from the prior week included Eclipse eRL, which was making +$2,740, Axiom eMD making +$1,980, and Axiom ES making +$925.
Closed out trades last week included Tzar reversing long in the ES, NQ, eRL, and eMD for open and closed trade p/l for the week of +$1,042.50, -$500, -$2,210, and -$2450 respectively. Rounding out the stock index swing trading activity was the Seasonal ST system, which entered long the ES and eRL during the week.
In the bond market Mesa Bonds and Mesa Notes are still holding long and added open trades gains of +$562.50 and +$171.88 during a small run up in bond prices last week.
***Long Term***
Long Term trend followers continued to enjoy the extended up trends in both the Metals and Tropical markets last week. Most systems entered their long positions in these markets in the 3rd and 4th quarters of 2005, but are still reaping the benefits today. These are the types of trends long term systems are designed for, the "home runs" or the "rainmakers", that extend for 9, 12, or 15 months.
Systems with long Sugar positions are a great example of sticking with a great trend. The commodity which began rallying in April 2005 is up 75.92% (not including carrying cost) in the last 9 ½ months and systems began entering positions in late June and early July catching almost the entire rally to this point. Systems with long positions include: (Please note current profits reflect the front month contract March 2006 only). Aberration Plus (+$4884.00 per contract), SEMA4 Symmetry (+$5214.00 per contract), and Axiom LT is long in London Sugar for profits of +$3355 per contract.
Metals have also been steadily rising higher as investors flock to Gold, Copper, Palladium, and Platinum. Notable metals positions include Aberration making +$2010.00 per contract in Palladium and +$6135.00 per contract in LME Aluminum. SEMA4 Symmetry is making +$5560 per contract on a long Gold trade. Axiom LT and Andromeda are both long in Palladium for profits of +$1535.00 per contract.
Finally, Trend Simplicity is long in High Grade Copper for profits of +$1675.00 per contract. There were no closed out trades last week.
Please Login to: http://www.attainaccess.com for the latest updated statistics.
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.