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System Spotlight: Brix

April 11, 2005

 

What's been the best performing trend following system at Attain Capital over the past 12 months? Its not Aberration, Andromeda, or Synergy.... The answer is the Brix system by Alfaranda CTA. This month's system spotlight highlights Brix:

Who is the Developer?

The Brix system was developed by Alfaranda CTA, a long time system development company owned by Ziad Chahal. Ziad began writing systems in 1996 after his interest in the futures market was sparked in 1993 by searching for returns uncorrelated with the stock market. At that time he was running his own consumer electronics business, and putting too much money into what he viewed to be an uncertain stock market. He was searching for some much needed diversification and found some in the futures markets.

He ended up losing money on discretionary trading, but immediately challenged that outcome through the research of systematic trading approaches. Only through a systematic approach, Ziad concluded, could traders avoid falling prey to their emotions where trading decisions are made by simply "shooting from the hip".

While researching for his trading systems he studied and obtained his CTA license in 1996. While studying he became a fan of the book “The Futures Game: Who Wins, Who Loses and Why”, which he recommends to all traders. Mr. Chahal's system research has resulted in over 20 systems over the years, with the most recent batch that includes Brixx and Tzar considered by Ziad to be the culmination of his years of effort.

Ziad currently resides in Lebanon with his wife of 26 years and his four children. He equally attends to his business as a trading system vendor and CTA. He continues to research and develop more trading systems which he hopes to release in the future.

How does it Work?

Brix is the upgraded version of Alfaranda CTA’s Basis II system, and was released in mid 2003. The system maintained its trend following, multiple market style through the upgrade, while adding logic to filter out the choppy periods which can hurt trend following styles. Alfaranda CTA offers several multi-market portfolios for Brix and the system was tested across 100 global markets, but the developer’s standard 10 market portfolio is the most popular.

On average, Brix takes 5 trades per market per year (excluding roll-overs) and is "in-the-market" around 95% of the time, normally choosing to reverse a position than get stopped out. A variety of risk level trade filters can also be used, although most investors set the risk filter at $3000 per trade (meaning the system takes no trades when the risk is above $3,000 per contract).

Brix’s logic is black box and not disclosed to the public, but we do know that Brix is not built in the classic mold of other Donchian breakout trend following systems like Aberration. Rather, Brix uses a combination of Mr. Chahal’s Basis II (released in Jan. 1998) and Weaver-LT (July 2000) strategies to identify trends while filtering “noise” out of the market.

While counterintuitive, this filtering actually results in a higher percentage of time in the market, as less “whipsaw” trades are taken. . The system employs this trading strategy across all commodity groups, which eliminates the possibility of curve fitting to specific markets.

One unique quality of the Brix system is that its indicators not only tell the system when a breakout has occurred, but also inform the system that a breakout is likely to occur at a calculated predefined price.

Most other trend following systems use an indicator based on market volatility, meaning that a close above or below a volatility band causes a new entry order. This order is then placed as a market-on-open order on the day following the assumed breakout point.

In Brix, a set of technical indicators has been devised to closely "read" the chart and define price levels from which the market will breakout to the up or down side. As these breakout points get defined, the system issues (daily) signals to reverse the ongoing position or establish a new one using buy-stop/sell-stop orders at specified prices.

On the exit side, Brix can use reversal orders to go from short to long or long to short according to the prices that have been calculated by the system's logic. A long or a short position's life can be as short as 24 hours sometimes, DESPITE the long-term nature of the system. The stop-loss value in Brix is always known beforehand and is derived by the system as a function of the market's average range (given a minimum stop-out dollar value of $250).

A last defining characteristic of Brix is the length of time the system spends in each market - as Brix will have an open position approximately 95% of the time. This amount of time is significantly longer than other trend following systems and requires Brix investors to have a higher risk threshold than those who trade typical Donchian breakout systems - although the drawdowns in testing and in real time have been less than or equal to other trend following systems.

Attain Comments:

Brix is another in a long line of good looking systems from Ziad Chahal and Alfaranda CTA, having been released and actively traded for clients at Attain since the middle of 2003.

As with all of the Alfaranda systems, one of the biggest positives we see in Brix is its very robust hypothetical testing. The system was tested on over 100 commodities over a time period that exceeded 30+ years and generated some 10,000 trades. Tests were taken even further by submitting the system's logic and parameters to the unintended use of INTRADAY data, and then further tests were made on the end-of-day data of individual stocks. The exact same set of rules and parameters was also used in all tests to insure no optimizing.

As you can see, Alfaranda has gone beyond what most long term system developers test on to insure that Brix is very robust, and the tests were very encouraging, showing no breakdown when applying the system to stocks, and random commodity markets.

The next thing we like about Brix is its performance. (See below) The system did go through a tough spell from Sep. '02 through Nov. '03, but that track record includes the performance of Basis II, which was upgraded to Brix in July of 2003. Since that time, the system has been very consistent, managing to stay above water when other trend following systems and CTAs have struggled (summer 2004 & Q1 2005).

As mentioned above, Brix has been the best performing trend following system so far this year and over the past 12 months. If that doesn't impress you, consider that it has also outperformed the 7 professional commodity trading advisors we highlight on our website over the past 12 months, who have combined assets under management of $1.9 Billion.

At the end of the day, Brix is a great system for investors who are looking for a trend following commodity system but want to diversify away from the typical channel breakout model seen in systems such as Aberration.