Trading System Spotlight: Keystone eRL
May 14, 2007
System Spotlight: Keystone eRL
Keystone eRL - performance / website
We fielded several calls after last week's newsletter asking about "that e-mini Russell system" which had been the top performer over the past 6 months amongst the systems on Attain's list of under appreciated systems, which we call our 'Hidden Gems'. Well, "that e-mini Russell system" was called Keystone eRL, and we thought a good way to give more detail would be to highlight it in our quarterly system spotlight.
It has been very hard to find a consistent day trading system that has made money in this low volatility trading environment over the past three years. But we may have found the best option right in our own backyard, amongst those systems we have been tracking on our website. The Keystone day trading strategy from Founder Trading has hypothetically been one of top publicly available systems over the last few years, performing well in the full size SP, mini SP, mini Russell 2000, and mini SP Midcap markets. Now after a year of seeing the system perform in post release forward testing, and with client starting to trade it in real time, Keystone is ready to be added to Attain's recommended list.
Who is the Developer?
Keystone eRL comes to us from Founder Trading strategies, www.foundertrading.com. Founder Trading might be a familiar name to some of our readers and investors as this company also developed the Helix, Magnitude, and Cipher day trading systems.
Dustin Dubia started Founder Trading in 2003 after years of running is own cellular phone store chain in California and Washington State. A self made trader, Mr. Dubia began building S&P Index trading systems in 1996, and spent the next several years testing their profitability on his own. He finally got to a point he felt comfortable with, and began publicly offering his systems in 2003. After a few years of selling his popular flagship products with great success, a drawdown in the Helix program cut into the interest in Founder's products.
With this temporary setback, Dustin decided to focus on other endeavors in the managed account field and passed the company onto his wife Christina, who became a quick study in the trading system world. Christina Dubia has now been trading and designing systems on a full time basis for the past three years.
Keystone is the culmination of Christina’s hard work and is one of the original strategies she began offering when taking over Founder Trading in 2004. Should "her" new strategies continue to outperform "his" old ones - that could make for some lively talk around the family dinner table.
How Does it Work?
Keystone eRL is nothing more than the Keystone system applied to the e-mini Russell 2000 chart. Keystone was designed on the S&P 500 data - but can trade on any of the stock index futures markets (S&P, Nasdaq,Mid Cap), having dynamic inputs which correspond to the market the system is applied to.
In the developer's own words - “a robust Stock Market Index trading system should trade well across multiple indices without any modification. Even though future success is never guaranteed, the company [Founder] believes this additional level of robustness provides the best likelihood of future success. While designed strictly on S&P 500 Index data, Keystone meets this stringent requirement.”
The base logic is a suite of multiple trend and counter-trend systems which measure and react to market behavior principles such as Range Expansion &Contraction and Close Continuation. Developer Christina Dubia says the suite of systems comprising its logic can be classified as 60% trend-following and 40% counter-trend logic. That's intraday trend following - not the long term trend following we often hear about.
As with all Founder Trading systems, both buy and sell signals are mirror images of each other, meaning Keystone is not optimized for a buy or sell bias. Similarly, exits are exactly the same for both long and short trades. On each trade, the eRL system uses a 10 point initial stop and 20 point target. The stop will begin to trail in the afternoon to help protect against late adverse market moves. The system will use market orders, stops, and limits for entries. Typically breakout type trades in the direction of the market trend will be executed via stop order while the countertrend trades are entered on limits and/or MIT (market if touched) orders. The trading logic is exactly the same for all markets.
Keystone is an active system, and can take trades up to twice per day. But as a day trading system - all positions are exited before the end of day, eliminating any overnight risk. Keystone will, very rarely, reverse positions during a single trading day. The system was upgraded slightly in March of 2006, and the developer does believe that systems should be updated periodically (once per year) to take into account evolving market conditions.
Attain Comments:
In this day and age of low volatility in the equity markets - it is refreshing to find a day trading strategy that has performed equally well across the SP, Midcap, and Russell markets. Attain has long held that the e-mini Russell market is a better trading market than the S&P 500 or emini S&Ps, and we believe that the e-mini Russell should continue to be the most successful market for Keystone to trade due to its similar trading range to the ES and larger point value ($100).
Most recently, the strategy has benefited greatly from the markets tendency to “back and fill” - as the floor traders like to say. Essentially, this happens when the market gaps open above or below the previous day’s range and then fills the difference between the open and close, which has been great for Keystone’s countertrend philosophy.
The likely hesitation amongst some investors for getting involved with Keystone are the higher drawdown the system experienced in its backtesting, as well as the eventual poor real time performance of Founder's Helix and other systems (after very good initial performance).
The higher drawdown you see in the testing is actually a bit of relief for Attain, however - as it shows that the system was indeed created and tested on the S&P 500 data, and not the emini Russell market. The backrest, then, is on completely out of sample data - and insures us that the system has not been curve fit for current market conditions. I would choose a higher drawdown, non curve fit backtest - than a lower drawdown, curve fit backtest any day.
As for the prior performance of Founder Trading's past systems, including Helix, Cipher, and Magnitude - we can find solace in the fact that while the company and last name is the same, the developer has in fact changed (Christina instead of Dustin Dubia). Moreover, there were bound to be lessons learned from the previous systems which have made their way into Keystone.
Overall, Attain continues to believe in a well balanced managed futures portfolio which is diversified across day, swing, and long term trading - be it with trading system or CTAs; and Keystone eRL is a nice fit for clients who are missing that valuable day trading component.
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 |
***Overview***
The US Stock market took a breather last week from its record breaking pace as traders took time to thoroughly analyze Wednesday’s FOMC announcement. The announcement itself appeared to be a carbon copy of previous months with rates remaining unchanged, although traders will be looking forward to release of the notes in a few weeks to see exactly what Bernanke & Co. are seeing in the economy. For the week SP futures fell -2.00 points, NASDAQ futures were up +2.00 points, and Dow Futures climbed 60 points or 0.45%. In smallcap trading Russell 2000 futures were down -5.10 points (-0.61%) and SP Midcap futures fell by a penny.
The metals markets were last week’s biggest movers due to positive inflation numbers. Precious metals which are known as inflation fighters saw Gold fall -2.52%, Silver was down -1.66%, Copper dropped -4.11%, and Palladium moved -2.21% lower. However, Platinum futures headed in the other direction climbing +0.97%.
Energy prices continue to rise ahead of the summer driving season. Violence in Nigeria was the catalyst with RBOB Gas futures climbing +6.12%. Crude Oil futures were up +0.72%, Heating Oil rallied +2.46%, and Natural Gas was unchanged for the week.
In grain trading the monthly supply and demand figures were released on Friday. The report was very bullish for beans which climbed +1.91% and bearish for corn which fell -4.10%. Wheat was basically unchanged at -0.35%
Finally the only other market of note last week was live cattle which climbed +1.28%. The remainder of markets were very choppy and finished the week close to unchanged.
***Commodity Trading Advisors (CTAs)***
May has come just in the nick of time for many invested with CTAs, as commodity markets and CTA’s have been picking up as the stock market begins to show signs of a summer slow down.
A few of May’s MTD stars include NDX Capital - which jumped into the markets last week after sitting patiently for more than 2 months. NDX has on a minor position and is earning approximately 1% on the trade so far. Zephyr Asset is another May star so far - with Zephyr Aggressive ahead +3.6% and Zephyr Moderate ahead +3.9%. Zenith Resources also continues to impress and is ahead +1.3% on the Diversified and +0.7% in the Index program. With stock index futures option expiration this week, we can expect to see the index writers begin to work into the June contract.
In other trading, Dighton Capital gave back some of the prior weeks gains and continues to sit right on a -35% drawdown mark. Dighton has had steep drawdowns in the past and bounce back very quickly and bly, and this appears to be one of those times, nothing more. With only about $10,000 - $20,000 to go until a stop trade level is hit with Dighton - these levels represent an excellent chance to get involved with the program. If they rebound to their usual levels, (past performance is not necessarily indicative of future results) you could stand to make $50,000 to $70,000 through the rest of the year - while if they continue losing, the losses can be cut off at just $10,000 to $20,000 for your account. Risking $10K to make $70K always seems like a good idea in our book - but we realize it takes a certain type of contrarian personality most people don't have.
Finally, FCI gave back some open trade profits in the RBOB. FCI has several positions in the RBOB that experienced some open trade losses (aprox -$1,200). Noting that the positions are still more than 10% out of the current market with less than 2 weeks go before their expiration we will be monitoring that market to see if FCI holds on or exits….today was a good day as it fell more than 5% in the opposite direction.
***Day & Swing Trading***
Trading conditions were very slow last week ahead of the Fed announcement on Wednesday afternoon. While most traders were anticipating the Fed’s decision to keep the overnight rate steady, there still was the usual lull on Monday and Tuesday as major market players want to digest all of the information before making their move in one direction or the other. Immediately following the announcement, stocks were particularly jumpy-first getting a small lift, then selling off hard and turning back around on a dime to make new highs. This did not bode well for the day trading systems that sold the low that day using a breakout strategy and then being stopped out just minutes later. For the most part, swing traders finished the week nearly unchanged with a small drop for systems holding long.
The Dax systems were the top performers last week thanks to some big gains in European stock markets early in the week. Rayo Dax was the cream of the crop last week with profits of +$2,059.59 on two trades. Omega3 v1 Dax had more modest profits of +$252.59 for the week on one trade from Friday. On the other side, BWT Zones Classic SP struggled with the trading conditions and lost -$2,125 for the week.
The majority of the swing systems are holding long and finished down for the week. Spartan ES is the only swing system holding short and made back $100 in open trade profits. Seasonal ST had a one day short trade that ended in a small loss and entered long on Friday which is a losing trade thus far. Mesa Notes continues to hold long in the Ten Year Note and has been relatively unchanged for several weeks now.
***Long Term***
Interest rate futures drifted lower last week as market forces continue to be caught in a stalemate over which direction the sector is heading. The past week's FOMC meeting did little to break the current sideways pattern as ideas that the Fed would show signs of easing were unwarranted.. Government releases for the coming week again look to be growth sensitive readings which could spark a breakout of the recent sideways trend if they back up the results of past few weeks. The recent volatility and lack of trend has kept long term systems to the sidelines for the time being searching for a breakout of a new trend, although Aberration is short the June Bund and currently -230.00 Euros (Open Trade).
Activity in the currencies was again choppy during the past week, but activity seemed to point to changes on the horizon as the U.S. dollar staged a minor turn around due to weakness in the Yen and worries of growing inflation in Europe. Speculation of higher interest rate movement in Europe versus the major international players kept the Japanese currency (8-week Lows), although the U.S. dollar did turn up a tad on worries of a ber than expected consumer price report coming out in the week ahead. The recent volatile swings have kept long term trend followers on the sidelines, although Aberration remains short the DX with a gain -$180.00 (open trade).
Volatility was plentiful in the soft commodities during the past week with grains and oilseeds finding some support on a friendly construed monthly USDA supply/demand report last week. Weather was also a dominating factor as the market seems to have come to terms with the idea a large U.S. corn crop will get planted with time to spare which pressured corn, but supported soybeans on ideas less soybeans will be planted with profitability still leaning corns way at the moment. Wheat volatility was also very high as the market continues to filter through reports that the Easter freeze in the wheat belt did more damage than was earlier suspected. Aberration is currently long BO making +$876.00 (open trade), and Short CTN making +$2,550.00.
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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.