System Spotlight: Adaptive Futures US & Euro Portfolios
September 11, 2006
It seems the dream of every investor is to find a system which is completely dynamic - one that adapts to the current market environment no matter what is happening, thereby keeping the investor with what's working and out of what's not. In the simplest terms, that could mean a stop loss level which is a percentage of the underlying market price rather than a hard coded dollar amount. You can see how a stop which is hard coded could become obsolete if the market increased 100%, for example.
A new system at Attain has taken this approach of a completely dynamic system to the next level, applying adaptive logic to everything from the entries and exits to the position sizing and markets. The result is a system which will at times be trading just the Russell futures, while at other times in the Mid Cap, Nasdaq, and Russell at the same time.
The preliminary testing and results have been very encouraging - and this month's system spotlight is on this adaptive system, aptly named Adaptive. The system has two portfolios, one utilizing all US based markets and named Adaptive US, and the other using all Eurex based markets, and named Adaptive Euro. For more on Adaptive, check out www.adaptivefutures.com
Who is the Developer?
The developer of the Adaptive systems is Dr. Martin Wyatt from Hertford, that is the original Hertford, the ‘County Town’ of Hertfordshire, some 40 miles north of London in the UK.
Mr. Wyatt took the less traveled path to becoming a system developer, being a client of Attain first, and developer second. As a client of Attain's for nearly three years, trading Compass, R-Mesa and some other systems; Martin learned what he did and didn't like about publicly available systems - and eventually came to the conclusion that he was the one best suited to develop a system which matched his likes and dislikes. The result was the Adaptive system.
Martin’s background is in engineering and research and he is both a chartered engineer and computer scientist – a mix he feels has been critical in his ability to develop what he sees as a serious analytical tool. His background has long been in mathematical modeling and simulation and he feels his background as an engineer gives him the edge over scientists in this area. The issue he says is that engineers are used to coming to likely conclusions on limited data, the problem with scientists is that they want ‘perfect data’ before coming to any conclusion whatsoever!
Martin admits that modeling the behavior of markets has been an enormous challenge but believes that large markets with many participants behave in relatively smooth and predictable ways, the key issue he says it to get in on a move early enough and stay in long enough to regularly make money.
How does it Work?
The Adaptive system is a swing trading system which operates on stock index futures markets. The Adaptive system can be utilized on US markets, European markets, or both. The Adaptive US portfolio executes trades on the Nasdaq, the Russell 2000 the Dow and the S&P Mid Cap - while the Adaptive Euro portfolio crunches data on the French CAC 40, German DAX 30, UK FTSE 100, and Spanish IBEX 35 - all traded electronically on Eurex.
The system was developed based on the developer's general view on the market's that:
"in the longer term the price of a stock reflects all of the public information available regarding that stock blended with short, medium and long term views of the performance of the industry sector of which it is part and of the overall economy. Within this context buyers and sellers intervene in the market and pull the price higher or lower, edging it towards the ‘perfect’ price attuned to all of the knowledge available. That is the theory of the ‘perfect market’ and why some pundits say that it is impossible to make money through short term trading.
The fact is that on a daily basis the price is a tussle between buyers and sellers and whilst in the medium to long term the ‘perfect market’ hypothesis may well be correct, in the short term, unless the underlying trend is very b, the price of stocks, and thus stock indices, tend to oscillate around a longer term ‘perfect market’ valuation."
The system logic which resulted from this view of the market is a logic whose object is to Swing Trade and make money out of those short (one to twenty day) oscillations by buying near to the bottom of an oscillation and selling near to the top or sometimes vice versa.
Adaptive does this by focussing on just two fundamentals, price and volatility, or more correctly - changes in volatility. It uses none of the traditional indicators such as moving averages, relative strength, or stochastics – as these all suffer from ‘lag’ and simply get you in too late, according to the developer.
The underlying system generates many signals, but not all signals are executed by the system. The trick, as Mr. Wyatt puts it, is to select those signals with the highest likelihood of ending in a profit. The selection process comes from a dynamic analysis of past data on multiple time frames which enables the system to "understand" and "identify" key patterns and characteristics of underlying behavior.
Relative volatility is used as a key indicator for setting stop and limit levels, and also relays to the system how long to stick with the trade. A single stop is set but the target limit is adjusted on a daily basis, sometimes increasing if the velocity of the move gathers momentum, sometime reducing to reflect a ‘flat’ period. Using volatility in this way also makes the system ‘self adjusting’ to market conditions.
The developer is quite scathing of the philosophy which says a single set of parameters applied across multiple markets and time periods is a characteristic of a good system. Just look at the changes in the behavior of the markets since Hedge Fund trading came to dominate matters; he says, approaches which made a lot of money only a few years ago completely fail to perform in today's markets – meaning you need to have a system which evolves and adjusts itself as market behavior changes in his view. And that is exactly how he developed the Adaptive portfolios.
The second key feature is that Adaptive trades more than a single index, indeed it trades more than a single region - operating on both US and European stock index futures. The portfolios each include four futures markets, making portfolios which have natural diversification and the opportunity for more trades in order for more efficient time in the market.
The system averages five or six trades a month on average but doesn’t "have" to get into the market unless the prospects are b, so it does sometimes trade sparsely over quite long periods.
Attain Comments?
Having seen the Adaptive system go from just a thought in the mind of a long time client to a successful system now being operated for other clients - we do have an extra sense of confidence in the Adaptive system. We've worked with the developer to let him know what's possible, what realistic assumptions to make, and helped work out any technical issues and bugs which can surface with a new system.
We began trading Adaptive for his account in February and have since worked out all of the technical bugs, with the final version available to clients was finished in June/July and is now available.
The strategy is very different from other programs in that it trades either the US and/or EUR indices based on the strength of the signal versus on a fixed contract basis. For example it can trade up to 3 contracts at any one time, where all 3 contracts could be in the same market if the strength of that market outweighs the other indices ( think the incredible run the Nasdaq was making in 2000). The system will take the first three signals it gets, regardless of the market, and in this manner is truly dynamic, as a flat market will be filtered out in favor of the market which is showing the short term oscillations.
As always, we also like the fact that the system was traded first and foremost by the developer himself, with his hard earned money, and that the developer continues to have both the Adaptive US and Adaptive Euro portfolios traded for his account at Attain.
Some cautionary notes would include that the system can risk between $3k and $4k at current market volatility levels, making it definitely not for the faint of heart. But overall, we're impressed with the "adaptive" nature of the system and how the actual performance to date has been tracking with the impressive hypothetical track record.
- Jeff Eizenberg
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 high flying Energy futures markets continued to pullback last week due to a potentially huge oil field discovery in the Gulf Of Mexico. Analysts are already estimating that nearly 15 billion barrels of oil will come from this find making this new field the US’s second largest oil reserve behind Alaska. Energy prices also moved lower due to the end of summer and the driving season that goes along with the warmer weather. For the week Crude Oil futures fell -4.25%, Unleaded Gas dropped -7.22%, Heating Oil was down -6.31%, and Natural Gas fell -6.31%.
Surprisingly the lower energy prices were not enough to boost the US Stock indices into another week in the black. Trading volume was very light for the week which usually results in the market rallying higher, however this week that was not the case as SP futures fell -1.01%, NASDAQ futures dropped -1.23%, Russell 2000 futures fell -1.81%, and SP Midcap 400 futures moved -1.87%.
In currency trading the US Dollar continued its rebound last week as the greenback gained +1.26% on the competition. Falling into the red were Eurocurrency futures which moved -1.32% lower, Swiss Franc futures were down -1.48%, Aussie Dollar futures fell -1.70%, and Canadian Dollar futures dropped -1.29%.
Metals prices also moved lower last week as analysts expect demand to cool if the economy slows down as expected. For the week Gold fell -4.58%, Silver was down -5.93%, Palladium dropped -2.42%, an Platinum moved -2.02% lower. High Grade Copper was the only precious metal to move higher gaining +4.39%.
Elsewhere in commodity trading Cotton fell -2.32%, Coffee fell -1.35%, Sugar was up +4.39%, Live Cattle moved -1.12% lower, Soybeans fell -0.63%, and Wheat dropped -0.95%.
***Day Trading***
The shortened Labor Day week made for slow conditions for day trading systems in equity future markets, but now that we’ve made it through the typical summer doldrums and with no holidays in the near future, things should start to pick up in the stock market and help jump-start day trading programs.
As is often the case, slow conditions in the stock market usually means less than stellar performance for day trading systems that rely on intraday volatility. With that being said, there were a handful of programs that were able to stay above water for the week despite the lackluster conditions.
Impetus eRL had one trade on Wednesday that profited +$110. Tanker had one short trade on Thursday that made +$100. Crude oil has been trending lower for several weeks but the majority of the moves have taken place in after-hours trading hence the reason for limited trades for Tanker. Phil Plus Dax had an up and down week with net profits of +$17.50 after trading every day except Friday.
Omega3 v1 Dax had one trade on Monday for a loss of -$274. BetaCon 4/1 Dax had two trades for a loss of -$398. Epsilon Bund struggled with a sharp reversal in bond prices last week and subsequently lost -$460. Rayo Plus had four trades for a loss of -$958.50. Compass SP had three trades for a loss of -$1,762.50. RC Success eRL had four trades for a loss of -$1,798.30. Finally, Beta v2 Dax was active with seven trades for a loss of -$2,268 for the week.
***Swing Trading***
As predicted the first week of September brought several markets back to life, including the currency markets…
The trade of the week goes to several FX strategies which capitalized on the USD’s strength – topping the list was SC Forex GBP which closed out trades today for a 1 weekly gain of +$5,850 and is now earning +$5,630 since live inception back in April. Another FX strategy that capitalized was Volcano which combined for +$1,676 across 3 markets.
Several stock index systems also had a good week – the 4 US Tzar markets combined for weekly gains of +$3,168.50 and Targets eMD gained +$1,433.35.
Other trading included a couple of winners for the week - with Gettess US making +$325 and Jaws Narrowneck bonds gaining +$125; while the rest Mesa Notes -$234.38, Adaptive US -$455, , Delphi eRL -$660, Axiom eRL -$670, Axiom eMD -$717.1, Targets eRL -$990 and Delphi eMD -$1,030.
***Long Term***
As we enter the final quarter of 2006, long term trend followers are hoping for the same fourth quarter comeback they've seen in the past two years after another tedious year of trading in 2006. The good news is that trends are developing or are already in place in a wide array of markets including energies, softs, and currencies.
Sugar has enjoyed one of the largest trends as Sugar prices have fallen drastically off the contract's February highs. Most systems have entered short positions in line with this big downward trend; and as energy prices continue to fall (Sugar is used in Ethanol production) it is reasonable that there is plenty of room to go on the downside. Systems with short positions include Trend Simplicity which is making open trade profits of +$3668.40 per contract and Aberration Plus which is making +$3070.00 per contract.
Cotton, also a tropical market like Sugar, has enjoyed a nice sell off as well over the course of the last month. This year’s cotton crop has benefited from a rather calm Hurricane season in the Gulf of Mexico and if the storms stay away prices will have an opportunity to move lower. Systems with short positions include Vivaldi Seasonal Trends which is making +$1680.00 per contract (open trade), Axiom LT which is making +$45400.00 per contract (open trade), and Trend Simplicity which is making +$650.00 per contract (open trade).
Not too many systems have short energy positions yet even though the market has been in a downward trend since early August. Systems with short positions include Axiom LT which is making $6300 per contract (open trade) on a short Crude Oil position, and Trend Simplicity which is making +$4700.00 per contract (open trade) on a full size Crude Oil trade. Aberration Plus is short an e-mini Crude Oil trade for profits of +$1662.50 (open trade) per contract. Emini’s are great option for investors who do not want to take the risk of a full size energy contract and can cut the risk (and profits) of each trade in half.
Closed out trades from last week include Andromeda getting stopped out of Eurocurrency for a loss of -$1425.00 per contract, Axiom LT was stopped out of Palladium for a loss of -$3275.00 per contract, and Trend Simplicity was stopped out of Silver for a loss of -$1250.00 per contract.
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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.