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System Spotlight: Impetus eRL www.tradingvisions.net

January 17, 2005

 

After the Impetus eRL system topped Attain's list of the best combination of return, risk, and amount of data, the obvious choice for this month's System Spotlight was Impetus eRL from Trading Visions Systems, Inc. As of the end of 2004, Impetus eRL ranked in the top three of all systems for Sharpe, Sterling, and Sortino ratios. For more on Impetus, read on:

Who is the Developer?

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 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 systems: Axiom, Early Bird, Cobalt, and Spectrum.

How Does it Work?

Impetus is a daytrading system that embodies the simple equation of power + direction = the trend. Two market observations form the basis of this equation:

1. that a certain amount of volatility is likely to presage tradable moves, and
2. that there is often a decisive move late in the trading session.

The system uses very simple logic, with only one optimizable parameter that gauges the power of the market. No indicators are used, with reliance solely upon price action and time. Impetus attempts to enter trades only in the direction of the intraday trend, and utilizes two types of trades to take advantage of that trend.

The first enters in the direction of the trend on a breakout. The second trade type occurs after a retracement from the main trend, entering as price returns toward the trend. The system is designed to be in the market just a small fraction of the time (less than 1%), trading about twice per week, on average.

Originally released in early January, 2003, Impetus was designed to trade the S&P. However, with the reduction in intraday range volatility to pre-1997 levels, the system was left with few possible trades and it made sense to look to more favorable market environments. Without any changes to its logic, Impetus was found to work particularly well on the e-mini Russell 2000, which has taken over volatility leadership and has a point value of twice the S&P.

Like many day trading systems, it's critical for Impetus to have healthy intraday volatility, and the Russell market offers just that. Along with the higher point values of the Russell, this makes it possible to find swings large enough to carve out winning trades.

It is also exciting to note that since the system was designed for the S&P market, the trading of it on the Russell represents a complete out of sample test. The fact that it not only tests well on the Russell, but has made profits in actual trading provides verification of the robustness of Impetus.

All trades are entered using stops. Protective stops that adjust to price and volatility are entered in all cases, with the maximum risk known in advance. When a trade has advanced sufficiently, the stop is moved to protect a small profit. Impetus may be purchased fully revealed for $1500 (TradeStation code plus manual), or it may be leased and traded through Attain for $45/month/e-mini.

Attain Comments:

Despite starting the new year off in a bit of a slump, Impetus eRL continues to gain attention from investors due to very consistent performance throughout its first full year of trading at Attain. The system's lower risk profile is very appealing as well. It is very selective, trading only about 5 times per month on average, and only entering the market in the afternoon. By limiting the amount of time it is in the market, the system limits the amount of time investor's money is at risk, which is a common sense approach to risk management.

The same logic was traded in the S&P contract at first, but the S&Ps market conditions of shrinking daily ranges and evaporating volatility made it hard for the system to thrive there. The emini Russell market has picked up steam recently as volume there was at its highest levels ever, and the increased volatility has helped to give Impetus a desirable risk/return profile on the Russell market.

The follow-through of the Russell market in the late afternoon as it surged to new all time highs time and again last year also helped Impetus eRL. By only entering the market after 1:30PM CST, Impetus appears to have more success getting in line with the daily trend.

The system is often leveraged with several emini Russell contracts as the full-size Russell market is not recommended due to liquidity issues. The system has also experienced very little slippage, because of the high liquidity in the emini Russell market and the use of stop orders as opposed to market orders.

Investors often want to know what system has the best return for the lowest amount of risk. Well, the Sharpe, Sterling, and Sortino ratios tell us just that, and all point squarely at Impetus eRL.