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System Spotlight:

November 14, 2005

 

www.tradingvisions.net

 

While swing trading has been a very tough way to make a living over the past two years, the system at Attain with the highest average annual rate of return, highest Sharpe ratio, highest Sterling ratio, and highest Sortino ratio is none other than a swing trader - Axiom Index eMD.

But right as the Axiom Index eMD system was making new all time equity highs in September, the developer came out with another swing system he thinks gives investors just as good of a chance at success - Delphi eMD. This month's system spotlight focuses on one of the top ranked systems at Attain — Axiom Index eMD — and the new offshoot of that system, Delphi eMD.

Who is the Developer?

We often expect to see engineers and mathematicians as system developers, but are surprised time and time again by the diverse backgrounds we encounter. The developer of the Axiom Index eMD trading system is none other than a retired public high school teacher of over 20 years named Lincoln Fiske.

Mr. Fiske 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 performed quite well for him. The result has been Trading Visions, Inc.(www.tradingvisions.net) - the company he owns and incorporated last year. Trading Visions Inc. is also the developer of day trading systems: Early Bird, Cobalt, Spectrum, and Impetus eRL.

How Does it Work?

AXIOM Index eMD is actually based on work originally done in developing a long term position system. Even though indexes are notorious for not being amenable to trend-following systems, the developer decided to test the long term system on intraday index data to test its robustness.

The system tested well across a spectrum of indexes, and after some minor refinements, the index system became AXIOM Index, and the position system became AXIOM Long Term, which trades a wide variety of non-index, global markets.

The premise for AXIOM is that true trends are usually the result of the confluence and mutual confirmation of several trends of different periods. Axiom is therefore a trend-following system that enters after a breakout or retracement from the main trend.

In order to reduce the extra slippage characteristic of stop entries beyond a pivot high/low, AXIOM enters all positions at the market. The system averages from 2.5 to 6 trades per month, depending upon the index, and it is in the market 50-60% of the time. Filters are used to keep the system out of periods with too much or too little volatility.

The developer believes there are three key elements in establishing a system's viability and robustness: 1) does it use the same rules to trade a variety of markets? 2) Does it work when applied to out-of-sample data? and 3) Does it perform on out-of-sample markets? If the answer is yes to one or more of these questions, then it is more likely that a system will hold up over time.

AXIOM's basic entry technique applies to intraday and daily price bars, something which is fairly unique, and the exit strategies are very similar. AXIOM Index uses the same entry rules for all markets to avoid being curve-fit to one market. It uses Fibonacci numbers as specific parameter values, not because the developer believes there is something magical about them, but because it's an approach that reduces the possibility of curve-fitting, because there are fewer numbers to choose from.

After AXIOM was completed, the developer was pleased to see that it tested well on many other indices. A trend is a trend, with the main difference between indexes being whether one is volatile enough and has the value per point to make trading it worthwhile.

Another of AXIOM's strengths is its exit logic. Trend systems typically require large protective stops, in order to catch a trend and stay with it. AXIOM uses a relatively smaller initial stop ($325-$650 for the e-minis). Because trend-following systems go for the big moves, they consequently often have to give back a good amount of paper profits in order to stay with the trend. This often leads to a winner becoming a loser.

AXIOM utilizes a profit lock stop that quickly moves from the initial stop loss to a stop that locks in a moderate profit when a level of open-trade equity is reached. This minimizes the time a trade is at a risk for loss, which is psychologically important in trading a system. It also increases the percentage of wins significantly. After the first profit lock, the system trades almost wide open, in order to stay with the trend. Two other profit locks are used, along with a profit objective.

Differences in the newly released Delphi eMD

The main logic of Axiom Index uses a variable channel that is composed of different length trends, and if two of three agree, a trade is possible. Delphi also uses a channel, but it is based upon very different logic and is generally faster than AXIOM's. Both can enter on a trend breakout or a retracement from the main trend. Delphi also uses shorter-period bars, making it faster in and out of trades; whipsaws are controlled with a proprietary filter that dampens the likelihood of trades close to prior trades.

Delphi therefore trades somewhat more frequently, about 7 trades per month vs. 4-5 for AXIOM. While AXIOM uses dollar-valued exits, Delphi uses ATR-bases exits. This means that in today's markets, Delphi's profit objective is about half that of AXIOM, and it is achieved about 20% of the time, vs. AXIOM's 5%.

AXIOM uses a volatility filter that keeps it out of the market when recent volatility has been higher; Delphi has no such filter, and therefore runs more wide open, capturing more moves, but also sometimes being in the market at the wrong time.

A final difference is that AXIOM uses an early trailing stop, such that when, for example, an eMD trade is up 6+ points, the protective stop is moved from risking $650 to protective $200; this results in psychological comfort and a high percentage of wins (about 55%), but also sometimes causes an early exit from what would have been a good trade.

Delphi's trailing stops is ATR-based, and it generally engages later than AXIOM's first level trail, and protects less. It therefore has a lower winning percentage (about 40%), but it can also stay in good trades that AXIOM has exited from. I trade both systems, and I like the mix of approaches. Typically, when one system misses a trend, the other will catch it.

Attain Comments:

There is a lot to like about the Axiom Index eMD system, starting first and foremost with its consistent performance over that past 16 months. It has a long way to go to match Compass' 69 month track record and 5 out of 6 years in the black. But starting out with two big winning years goes a long way to starting a legacy.

There is also a lot to like about the Delphi eMD system, which was just released in September; mainly that it 1. has come out of the gate performing right in line with its historical testing and 2. shares much of the same logic with Axiom Index eMD.

The main worry with Axiom eMD is the market it trades on. The eMD symbol represents the e-mini S&P Mid Cap futures, which are the least liquid of the four main US index markets (S&P, Nasdaq, Russell, and Mid Cap), and too many contracts on the system could cause it to lose some precision in its entries and exits. For this reason, developer Lincoln Fiske and Attain closely monitor how many contracts are traded on the system - and will stop selling leases to the system should the volume become a concern.

The other worry for Axiom was the dismal performance the system had in the ES market this year. While Axiom Index eMD was making new equity highs, Axiom Index ES actually went through Attain's stop trade point and was removed form several of the TradingVisions portfolios.

For developer Lincoln Fiske, the constraints on the number of contracts that could be traded in the eMD market using Axiom Index and the underperformance of Axiom Index on the ES meant he could do better — and the result of that effort was Delphi, which addresses some of the shortfalls that became apparent in the ES market and will help keep the number of contracts within reason by spreading clients between Delphi and Axiom Index.

We have seen a steady decline in market volatility over the past 20+ months (this is no secret)…essentially the markets are not behaving as they did during the stock market boom or correction (1998-2002). Considering this lack of volatility, it has become increasingly important for swing trading systems like Axiom and Delphi to have more patience with index markets in their attempts to capture larger weekly or monthly trends. This is in stark contrast to the volatile boom and bust period (1998-2002) in which one or two day trends provided enough market movement to pad traders' accounts. Axiom will trade more often in consolidating markets, and Delphi even more so than Axiom - but perhaps because of their long term system roots — both will allow trends to follow though for many days once they are established.

As the developer suggests on his website and believes wholeheartedly - you can never know which market (SP, ND, RL, MD) is going to afford the greatest opportunities for a particular trading system or strategy moving forward. While Axiom Index eMD has been much better than the Axiom Index system on any other market - the tables could turn and the top performer over the next 24 months could be the NQ or eRL. The only way to make sure you are trading the top performer among the four markets is to trade all of them. That's what diversification is all about.