Monthly System Spotlight: Bounce Day & Swing Trading Systems
January 15, 2007
After seeing Bounce systems ranked numbers 3, 6, 7, and 11 in last week's newsletter showing the "Top Fifteen" systems at Attain as ranked across eight different statistical categories, and the "index" of all the Bounce systems combined landing in the 2nd spot after gains of over $22,000 on a $25,000 investment last year - the Bounce suite of systems is demanding a lot of attention heading into 2007.
So, What is "Bounce?", "Who is Bounce?" "How high can it Bounce?" 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. With over two years of actual trading results, and a banner year last year in 2006 - the Bounce systems are this month's system spotlight.
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 4 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. But we've seen good performance in the last two years as the market has been in rally mode.
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" off 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, and now has over two years of very good actual trading results to back that up. One thing to keep in mind is that the system can be hindered by a lack of movement in the stock index markets - and the hypothetical track records show how the system can be dormant for long periods of time. This can help prevent losses, and is not a problem in and of itself - but can be frustrating to investors who are paying monthly lease fees.
With just a $10,000 initial investment for each program, or the ability to do all four with just $25,000 - the Bounce suite of systems should be a good fit for nearly all investors, except for those more interested in daily activity than long term performance. 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 |
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.