System Spotlight: Compass S&P day trading program
August 27, 2007
What a long trip its been for the venerable Compass trading system. Now in its 8th year of actual trading, with an unbelievable 90 month track record (the longest such record for a publicly available trading system we know of), the system is putting the finishing touches on a fifth straight profitable month in August - and just made new all time equity highs on August 15th.
Few may have thought that would have been possible this March, when the system hit a new max drawdown of -75% and had been underwater for over 20 months. And the system did eclipse the statistical "line in the sand" we laid out in our 6/21/04 newsletter. But as we've said before, systems don't break - they just become more risky.
But in the five months since April when volatility has been on the rise, Compass has been on a tear and reverted to its old form in making nearly $20,000 per full size S&P contract, or 65.50% on the recommended initial capital of $30,000. That's an annualized rate of return of 157% per year. So while the system did cross Attain's line in the sand with a new Max DD, it has shown that it definitely isn't broken - just a little riskier than before.
This month's system spotlight is on Compass:
Who is the Developer?
The Compass system was developed by Jack Telford of Mariner Trading in 1999 after 16 years of trading stocks and S&P 500 futures.
A computer software engineer since 1976, with degrees in business and computer science, Mr. Telford first found out about the futures markets when living in DC in 1986, working on a defense contract. As the story goes, Jack was in between sessions and headed to a bookstore right down the road from the White House to pass the time. He picked up an issue of Technical Analysis of Stocks & Commodities magazine, and was hooked, later saying: "The technical slants in there really opened my eyes to the possibilities of that type of investment."
Not believing in the Internet bubble, Jack set out to develop a trading system which was 100% mechanical in the late 90's. He based the trading logic solely on price and time, having witnessed the index market’s volatility wreak havoc on many systems based on traditional technical indicators.
Mr. Telford has been a client of the Attain Capital partners for over 10 years; having traded Compass for his personal account before offering it to the public in January of 2000. Mr. Telford continues to trade his program alongside those investors who have leased the signals, maintaining an account at Attain Capital for such trading.
Jack resides in Cincinnati, Ohio with his wife and two children, enjoying coaching his son’s hockey team when not testing new trading systems and methods.
Mr. Telford wants the public to know that he is not your normal run-of-the mill system developer looking to make a living selling programs. In his mind, what makes Mr. Telford unique is that he wants to make a living from the profits of the Compass system. We have told him this is a dangerous way to think, as there are bound to be losing months, quarters, and even years - but he sincerely believes it, and has tried to design a system which can, on average, consistently make him a "monthly salary".
How Does it Work?
Compass is a mechanical day trading system designed to monitor stock index futures for buying and selling opportunities during each trading day. The system was developed specifically for the S&P 500 futures market, one of the most active and liquid stock index futures markets in the world.
Compass utilizes a completely different concept to day trade the stock index futures market by being completely dynamic and reactionary. The system is unique in the fact that it relies exclusively on price and time, and contains no technical indicators. By using this unique structure instead of indicators like moving averages, swing highs and lows, etc. Compass insures it does not have any 'preconceived' notions about the day's price action.
The system looks for and identifies a specific pattern in which a trend is established in the morning, has a shallow pullback during midday, and then reestablishes the trend in the afternoon. Once the midday pullback begins (if it does at all), the system immediately generates either a limit or market order in hopes of getting in line with the trend at better prices. The system then simply gets in, or waits for the market to pullback and fill its limit order. The limit order is a nice feature in that it can eliminate slippage on the entry.
Compass can also signal a "power trade", in which the overall strength or weakness of the market is deemed so strong (or weak) when looking at the market internals (Advancing Issues, Declining Issues, Up Volume and Down volume), the system looks to get in sooner.
If the system determines that the market is extremely weak or extremely strong and that the market will have a more shallow pullback, this different entry logic is used. Compass will enter the market up to an hour early utilizing a more shallow pullback level or enter without waiting for a pullback at all. The system utilizes this method to capture market conditions where the price continues in the same direction the entire day without a significant pullback.
Two other unique characteristics are the timing of the entry and exit orders. On the entries, the system filters out all market activity before 10:30 AM CST, never taking a trade before that time regardless of what the market is doing. This effectively filters out the wild swings often present within a few hours of the open as the market tries to digest the economic reports which are released at 7:30 CST and 9:30 CST.
On the exit side, trades are exited no later than 5 minutes before the end of the trading session. This effectively filters out the wild swings that are sometimes present on the close due to earnings releases, etc.; and avoids the dreaded market on close order (nicknamed "Murder on Close" by floor brokers).
The initial stop is set outside of a predetermined fibonacci based retracement level, but is never supposed to risk more than $1,750 from the entry price. On profitable positions, the stop can be trailed behind a profitable position to lock in profits. And the system will issue a sort of windfall profit target for each trade, usually about 20 points, or $5,000. The system generates a maximum of just one setup per day and only trades 12-15 days per month on average.
Attain Comments:
There is a lot to like about Compass, but the most impressive statistic has to be its 90 month actual fill track record. In an industry that at times relies too heavily on unrealistic hypothetical track records, here is a system that you can see exactly how its done for over 7 1/2 years. This is the longest actual track record of any system we know of, and whatever you think of the system or performance - the fact that the system just made new equity highs again, three quarters of a decade after it was released has to impress you a little.
The downside of course is that nasty drawdown we saw during 2006 into the first half of this year. Not many investors even want to consider a program with a 75% DD. But if we examine that DD, and the two losing years Compass has had ('04 & '06) we see that it occurred at the same time volatility was making historical lows. It had a 50% DD in the middle of '05 due to that low volatility also.
The biggest threat to Compass is an extended period of very low volatility like we saw in 2004 through March of this year, where the market simply doesn't move enough for the system to be very profitable. But volatility cycles in and out just like everything else, and as we've seen recently the market volatility is definitely on the uptick.
The good news is that Compass performed great during an increased volatility environment in 2000, 2001, and 2002 (internet bubble burst, 9/11, etc). If we are indeed in a time of higher volatility, Compass could be just what the doctor ordered for your portfolio. Especially if your portfolio contains some option selling CTAs who don't like the spikes in volatility.
That big DD is still a worry of course, but here's another piece of good news - you don't have to come close to that DD number if you don't want to. If you think this is a period of increased volatility, and you think Compass could benefit from it with continued strong performance - don't let that big DD number scare you.
You can set a stop trade point/line in the sand at any reasonable level below the current level. The Max DD the system has seen this year has been -26%, the max DD before the big one was -50%. Both levels would works just fine as risk levels for Compass.
In short, if Compass is back in its ideal trading environment, the DD isn't likely to come close to -75%, and all you need is a safe amount of DD cushion to give the system to go through its normal performance oscillations. I recommend setting a line in the sand between 25% and 50% depending on your risk tolerance. Should the higher volatility continue and Compass does well, everything's fine - but if the high volatility environment starts to disappear and Compass struggles, you'll only suffer a 25%- 50% DD and can get out then. If it makes 50% before then, you'll have come out ahead.
In the end, we believe in Compass and continue to trade it ourselves, despite having eclipsed our statistical stop trade point. As Jeff Malec's old saying goes - systems don't break, they just become more risky - and that surely looks to be the case with Compass as it has come roaring back. For those investors who think the higher volatility is here to stay due to credit problems, Iraq, the housing market, and so on - Compass has shown that it can do well in times of higher volatility, and is definitely worth risking a 25% to 50% drawdown on in our opinion.
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 | Top 5 CTAs | Top 5 Systems |
Feature | Week In Review | Chart of the Week | Top 5 CTAs | Top 5 Systems |
***Overview***
The US Stock market finally found solid footing last week as investors began buying up stocks in some bargain hunting. One of the biggest headlines of the week was Bank of America’s $2 billion investment into Countrywide Financial Corporation. To some this was a sign that the worst is over in the much maligned credit market - although others still predict darker days ahead. Last week SP futures closed the week up +2.32% and Nasdaq futures were up +4.08% as tech stocks continue to stay hot. Dow futures also had a good week climbing +2.30%. In small cap trading Russell 2000 futures were up +1.49% and SP Midcap 400 futures rallied +3.23% higher.
Despite the bounce in the stock market, US Bond traders continue to predict a rate cute by the FOMC in September with bond futures climbing +0.91%. In currency trading the Euro continues to look strong against the dollar as Euro futures climbed +1.44% last week. Dollar Index futures were down -0.92% for the week.
In commodity trading Energy futures headed south as Hurricane Dean missed the oil rigs in the Gulf of Mexico. Natural Gas futures led the way falling an almost unbelievable -19.43% in just five days. RBOB Gasoline futures were next losing -3.56%, Crude Oil futures were down -1.02%, and Heating Oil futures were down -0.94%. Metals finished the week higher with High Grade Copper futures climbing +6.43%, Gold was up +1.60%, Silver gained +1.09%, and Platinum futures were up +1.25%. Grains had a wild week as storms flooded the Midwest. Wheat futures gained +7.77%, Soybean futures were up +4.50%, and Corn gained +3.76%. Finally in the meats live hogs gained +5.02% and Live Cattle was up +2.46%.
***Commodity Trading Advisors (CTAs)***
Following a much quieter week on Wall Street which rippled through to other markets, most CTA’s held idle with very little activity last week.
Elsewhere, there was plenty of action to report on in the commodity markets, including an impressive turn around for the CKP Lomax program. The program has erased an intramonth drawdown of approximately -15% and is now ahead approx. 2% for the month. Meanwhile, FCI, another commodity option selling CTA, is also having a successful month earning approx. 4% MTD; while Attain's own Strategic Diversification Program is up about 2.5% this month.
Dighton Capital is also playing the comeback game this month – after retreating into an approx. -30% drawdown during the middle of the month. Their trading has made a comeback, with accounts only in an approx. 14% DD now. Dighton is not for the faint hearted with their 30%+ drawdowns per year to coincide with their +73% annualized returns. But anyone who likes to buy things at a discount should open a Dighton account now without funding - and start trading when Dighton hits its next 30% drawdown, since the bounces to new equity highs off of those 30% DDs have been impressive.
Finally, it was another difficult week for the commodity spread traders as seasonal grain and agriculture trends are just not working thus far in 2007. As quoted from Michael Connor of Chicago Capital Management – “trades we have done hundreds of times over the years are simply not working this year”. Despite the drawdown we remain confident in Chicago Capital and are looking forward to their work into the remainder of the year.
To view each CTA’s July performance, here is the link: http://www.attainaccess.com/cta
***Day & Swing Trading***
Typically both day and swing trading systems enjoy more volatile trading environments. However the recent surge in volatility came so suddenly, one has to wonder whether the systems need to go through an adjustment period of sorts, in order to catch up with the markets.
Last week was perhaps the end of this adjustment period - allowing systems to capitalize as trading ranges returned to a more manageable range. Some of the swing trading systems passed with flying colors as Tzar eRL Filter closed out +$5228.61 in profits, Tzar ES and Tzar Filter ES made +$1557.50 in closed trade profits, while Ultramini YM (+$795.00 closed trade) and Mosaic eRL (+$470.55 closed trade) also had nice trades.
Other swing trading systems struggled slightly with Ultramini eMD losing -$531.00 in closed trade losses, while Tzar NQ (-$219.34 closed trade) and Bounce eMD (-$56.17 closed trade) posted losses.
The day traders also had their fair share of winners with Rayo Plus DAX making +$1124.52 per contract, RT-Viper YM made +$524.65 per contract, Bounce eMD MOC was up +$401.54 per contract and Beta Con 4/1 ESX made +$100.69 per contract.
Systems in the red included Compass SP - which must have heard we were going to do the System Spotlight on them today - thereby jinxing the system into a weekly loss of -$4175.00. (Good time to get started, however) Other weekly losers included Keystone eRL with -$710.00 per contract, and Waugh eRL being down -$842.86 per contract.
***Long Term***
The European currencies firmed versus the U.S. Dollar and Japanese Yen last week as the credit shock to the markets seemed to ease for the time being. The unwinding of the Yen carry trade slowed down a bit as speculation that the Euro Central Bank would follow through on a rate increase at their next meeting. Economic releases in the U.S. this week continue to be on the light side, but there will be key reports on mood of the consumer via various reports. Long term trend followers have moved into a mostly neutral stance as Aberration exited the recent short in DXU losing -$1270.00.
Rate futures maintained their firm tone during the past week eclipsing levels not seen since mid-May sparked by another round of liquidity injection by the U.S. Fed. Although the Fed move seemed to take the edge off of the recent equity decline, many pundits believe a cut in the Fed funds rate next month is still a high possibility, which should maintain strong underlying support for the sector. The upcoming week’s economic releases are light, although key consumer readings should keep the markets focused on the pulse of further erosion in the credit sector rather than current sustained economic growth that has kept the Fed focused on inflation. Currently long term trend followers have a neutral bias.
A firm tone in soft commodities during the past week seemed to prevail as worries due to equity jitters seemed to subside. The wheat market put in the strongest performance as world wide crop problems and tightening supplies sparked prices to levels not seen since records in 1994. The livestock sector was strong as Live Cattle price climbed due to higher cash and product prices with Lean Hogs rallying on news that China was ready to buy extra product to add to their tight freezer stocks. Look for underlying support in the grains and oilseeds to continue on worries of world crop problems for wheat and ideas current row crops will not meet big expectations. Aberration is currently long KWU making $5730.00(open trade) and short CZ losing -$412.50 (open trade). Positions stopped out recently include long BOZ making +$2154.00, and long CTZ losing -$3500.00.
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 | Top 5 CTAs | Top 5 Systems |
Past Performance is Not Necessarily Indicative of Future Results.
| Rank | Program Name | 12 month Return | 12 month Drawdown | Min Investment (k) |
| 1 | NDX Capital Management Shadrach Program | 34.74% | 13.59% | $100 |
| 2 | Financial Commodity Investments Program | 21.49% | 3.44% | $100 |
| 3 | Strategic Diversification Program | 15.43% | 6.26% | $1,000 |
| 4 | Swiss Program | 29.03% | 35.29% | $100 |
| 5 | NDX Capital Management Abednego Program | 7.40% | 4.78% | $100 |
Figures listed are as of 8/27/2007.
IMPORTANT RISK DISCLOSURE
The rankings above are the top ranked CTAs offered at Attain over the past 12 months using a risk adjusted ratio which equals the period return divided by the period DD.
Investments in CTAs can be subject to substantial charges for management and advisory fees. The % returns in the CTA table above include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.
The regulations of the Commodity Futures Trading Commission (CFTC) require that prospective clients of a CTA receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client's commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the Commodity Trading Advisor (CTA). This document is readily accessible at this site using the Disclosure Document link at the Attain website.
Feature | Week In Review | Chart of the Week | Top 5 CTAs | Top 5 Systems |
Hypothetical Model Accounts using Computer Generated and Actual Client Fills.
| Rank | System Name | 90 Day Return | Return in Dollars | 90 Day Drawdown | DD in Dollars | Min Investment (k) |
| 1 | Signum US | 12.94% | $6,468.75 | 0.40% | $200.00 | $50 |
| 2 | TZAR eRL | 52.97% | $15,892.30 | 14.13% | $4,240.00 | $30 |
| 3 | BetaCon 4/1 DAX | 54.17% | $10,021.05 | 15.87% | $2,935.72 | $19 |
| 4 | TZAR EMD | 34.23% | $10,270.00 | 12.77% | $3,830.00 | $30 |
| 5 | Compass SP | 47.42% | $14,225.17 | 25.78% | $7,734.35 | $30 |
Figures listed are as of 8/27/2007.
IMPORTANT RISK DISCLOSURE
The rankings above are the top ranked Trading Systems offered at Attain over the past 90 days using a risk adjusted ratio which equals the period return divided by the period DD.
The % returns in the trading system table above are hypothetical in that they represent returns in a model account. The model account rises or falls by the exact single contract profit and loss achieved by clients trading actual money pursuant to the listed system's trading signals on the appropriate dates, or if no actual client profit or loss available - by the hypothetical single contract profit and loss of trades generated by the system's trading signals over the test period. The hypothetical model account begins with the initial capital level listed, and is reset to that amount each month. The % returns reflect inclusion of commissions, fees, and the cost of the system. Commission and fee cost = # of monthly trades * $50.00 ($30 for eminis). The monthly cost of the system is subtracted from the net profit/loss prior to calculating the % return. For systems with one time purchase costs, the monthly cost is calculated by dividing the purchase cost by the number of months in the reporting period.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.
THESE PERFORMANCE TABLES AND RESULTS ARE HYPOTHETICAL IN NATURE AND DO NOT REPRESENT TRADING IN ACTUAL ACCOUNTS.