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Next Generation of Trading Systems- Looking ahead to 2006:

December 27, 2005

 

Come the end of any calendar year it is human nature to reflect on the past and look ahead to the future. This week I have the distinct pleasure of touching briefly on the past and more importantly introducing you to the next generation of trading systems and trading system portfolios.

Trading systems in their raw form have been around since the beginning of the markets and have been fortunate to evolve with both time and technology. It wasn't until the late 80's to early 90's when, for the first time, investors began to hear of quantifiable methods for back testing and later investing in the markets on a regular basis with a strict set of rules. The key to this equation was the computer and its ability to quickly test the validity of an investment strategy over many years of historical market data. At the time most strategists or system developers only had access to end of day market data whereby to basis their strategies success; however as we are all aware of today is a much different story. Today CNBC broadcasts time in hundredths of a second along with market news close to 24 hrs a day, global exchanges have extended their trading hours to meet liquidity demands, and more than 50% of global exchange trading volume is done electronically. All this is to say that market data is now more readily available then ever which in turn has led to the ability for system developers to research and build trading system on much shorter time frames and in many more markets.

As a result of improved data Attain Capital is able to offer investors a range of investments covering a wide variety of time frames and markets. Of the markets available 90% or more are traded on US exchanges— this is about to change.

Over the course of the past 10+ months Attain Capital has been laying the ground work to expand our trading operation overseas whereby US investors will now have direct access to a full range of end of day and intraday trading systems in the most actively traded European futures markets — including the German Dax, Euro Bund, Euro Stox50, and more .

Through our strategic execution partnership with TradingMotion (www.tradingmotion.com) our investors now have exclusive access to a range of systems designed specifically for the European markets via their existing Attain account...New investors are welcome.

Many of you might be saying, or at least I hope you are saying, hold on just one second…tell me more about these systems and how they work. You are in luck- below is an introduction to the next generation of your portfolio.

Before we learn about the specific systems it is first important to understand more about TradingMotion. TradingMotion is the #1 futures execution firm in Spain with over 4000 clients and in an effort to offer their clients a full range of investment products began offering European-based trading systems around the turn of the century. Since then European markets have exploded with volume and their system business has flourished.

Similar to Attain, TradingMotion firmly believes in 100% mechanically traded strategies across many different time frames and system logics. As such TradingMotion works with many different 3rd party developers whose expertise and focus is on the European markets. While there are likely hundreds of European-based systems TradingMotion has maintained the goal of working with only the best.

AutoTradingBot is one such developer and will be the focus of the remainder of the article.

AutoTradingBot Systems:

The fundamental characteristic of AutoTradingBot's systems is simplicity. Through their research they found that using fewer parameters per system resulted in a reduced chance of over optimization. Further, all of their systems have market driven entries coupled with adaptable exit strategies designed to protect and lock in profits when markets are trending in the systems favor.

"To incorporate too many parameters contributes to the potential for our system to experience an excessive adjustment to the historical curve of prices, (i.e "learning" too much of the historical data)."

As with any system, the key to the long term success of an investment strategy is consistency coupled with out of sample performance- AutoTradingBot's systems have both. Noting that when a trading system is first developed it has a tendency to be optimized to the sets of available data during the time of development AutoTradingBot implements a method whereby they offer clients the opportunity to invest in systems that have either fixed parameters or time adjusted parameters. A fixed parameter system is one that uses the exact same logic today as it did when it was first developed; while time adjusted parameter is one that is optimized over time.

Clearly any type of optimization has its risks - will the new parameters reduce the systems average winning trades, will it increase drawdowns, how do I know what type of drawdown to expect with the new system, just to name a few. We have all seen the pitfalls of optimization; however I will argue that most of the negative connotations associated with revising a system come from the fact that revisions are typically made only when a system is in drawdown or the developer "feels" like a new input will work better in the existing market conditions (i.e a new low volatility filter or moving from a 1 minute chart to a 5 minute chart). AutoTradingBot's systems are very different in this sense because they actually use time as the determining factor for when to re-optimize a strategy.

Optimization of their strategies occurs at different times and is conveyed to investors in the strategy name. For example below in the table below "Epsilon 12/12 Bund" uses 12 months of data ending December 30th to determine the trading parameters for the next 12 months and then repeats the same exercise in each of the following years for the year ahead. Another type of optimization utilized is historical optimization, in which they fix the beginning of the optimization period and continue to add new data. For example "Rho H/3 Dax" begins tracking data in January 2001 and then re-optimizes the entire data set every 3 months.

Optimization Examples:

Further differentiating their systems from the traditional development techniques, AutoTradingBot displays any optimized system results on a walk forward basis. That is to say that any optimized parameter is then recorded as out of sample trading and all past results remain in tact with the parameters that were used during their out of sample period (see results below using the table above).

The last and final question is how much capital do I need to get involved? In order to objectively calculate the estimated minimum capital requirements for each system AutoTradingBot utilizes a weighted average of the following 4 parameters:

1. A value equal to 2% of the maximum historical loss of each system. For example, if a system has had a maximum loss of 300 €, the first amount to consider would satisfy the following equation: 300 / 0.02 = €, or 15,000 € per contract. This way, the maximum loss per trade of the system should not exceed more than 2% of the initial investment.

2. The standard deviation of the daily results of the system, multiplied by a factor of 7 (this data point has been referenced in various trade magazines including "Stocks and Commodities").

3. The standard deviation of the monthly results of the system, multiplied by a factor of 4 (this data point has been referenced in various trade magazines including "Stocks and Commodities").

4. The greatest historical maximum drawdown of the system multiplied by a factor of 2.5.

In conclusion, global markets are becoming more and more accessible by the day; however the opportunity for everyday investors to reach them is still very much limited to high load mutual funds or those willing to bun the midnight oil to catch the European market opening @ 2:00 am CST. Through our relationship with TradingMotion our investors now have the ability to expand their investment portfolios across oceans and time zones into some of the most active markets in the world.

To view the performance of the current list of TradingMotion Systems log into www.attainaccess.com and then select "View Computer Backtesting" or e-mail us to receive a performance report @ invest@attaincapital.com.

- Jeff Eizenberg