System Spotlight: Jaws Trading Systems, Narrowneck Portfolio
August 8, 2005
www.alternativeinvestments.com.au)
While most trading system developers follow a business model whereby they develop a trading system, then try an get clients to trade it — this month's system spotlight is unique in that it highlights a portfolio of trading systems which already has clients trading it.
This month's system spotlight introduces a system which has been traded privately for years, but not offered to the general public until Attain Capital secured an exclusive agreement to execute the system on behalf of its clients. This month's system spotlight is on the Jaws Trading Systems.
Who is the Developer?
The developer of the Jaws suite of systems is Australian company Midshipman Services, Pty. Ltd. and its owner David Imgraben. Mr. Imgraben started trading futures in 1992 after some success in commercial property management on Australia's then booming Gold Coast. Ironically, his family still owns and operates a surf shop which they put into an empty suite in one of the buildings David developed in hopes of bringing some life to the building.
Mr. Imgraben's initial experiences trading were in Australian equities in the mid to late eighties. In his words, "it was pretty easy to be an expert stock picker at that time, you just had to throw a dart at a list of stocks on the wall, buy it and sell in three months, but that strategy didn't work so well after October 1987."
His interest in trading futures was sparked by a friend trading Australian index futures on the Sydney Futures Exchange. The ability to leverage was appealing, but it didn't take long to realize leverage was a double-edged sword. David also realized that discretionary trading was not his forte, and his trading style and psyche was far more suited to a mechanical and quantifiable approach.
Midshipman Services started to take shape while exploring the possibilities of systematic trading. His early systems were programmed in spreadsheets using manual, end of day updates - as accurate and reliable intraday data collection and maintenance was always problematic. David's interest in the markets he traded shifted to the highly liquid index and bond markets of the US. This was mainly in an effort to avoid the large gaps that would occur in his local Australian market in response to big 'overnight' moves on the major US markets. The development and improvement of electronic trading platforms along with server based data collection and maintenance and fast and reliable data transfer has enabled David to concentrate on full time trading and system development.
David is a CTA registered with the NFA and professional trader that trades a variety of mechanical systems for his own accounts and corporate accounts. David doesn't sell his proprietary systems but does lease system signals exclusively through Attain Capital Management. He lives with his wife and three children on the Gold Coast in Queensland, Australia
How Does it Work?
The Jaws trading systems contain a portfolio of many different models working on the US 30 yr bonds, 10 yr Notes, S&P futures, and Nasdaq futures. Today's spotlight is on the Jaws Narrowneck portfolio, which operates exclusively on 30 year bond futures, splitting the bond data across 3 different time frames with varying strategies on each.
The portfolio utilizes systems on a Daily chart, a 240 minute chart, and a 60 minute chart to provide confirmations and hedging between time frames. With an average hold time for each strategy of approximately 3 days, the triple time frame set up allows Narrowneck to often have offsetting positions, such as long in the daily and 240, but short in the 60 minute bonds.
While this may seem counterintuitive, it acts as a hedge during short term moves against the trend. The Daily system will act as the long term model, staying in line with the main trend as long as possible, while the 60 minute program reacts to short term moves quicker. The 240 minute model sits squarely between the two, often acting as the confirmation signal, taking the portfolio net long or net short.
The US Daily component trades 30 yr bond futures on Daily Bars and attempts to identify short term trends using a basic directional indicator. Once a short term trend direction has been established, the system waits for prices to "pullback" in order to get in line with the trend at better prices. The system has a fixed MM stop of $750 per contract and then works to move the stop each subsequent day as the trend continues.
The US 240 operates on 240 minute bars (natural hours) for the day session only and is a counter trend system looking for a combination of divergence in the RSI, overbought/oversold areas, and contracting ranges before entering long or short. The system has an initial 25 tick stop but is variable to smaller risk depending on the market. There is no profit target on this system but will actively move its stops as the market moves in the systems direction.
The US 60 operates on 60 minute bars (natural hours) for the day session only and actively looks for breakout trends in the intraday market. The system has an initial $500 stop and a windfall profit target of $2,000 per contract. Much like the other 2 systems it will actively move its stop as the trade moves further into profitability.
The NarrowneckPortfolio is a preset mix of the three different bond trading systems, trading 2 contracts on the US Daily, and one contract each on the US 240 and US 60 systems. The recommended capital is between $30,000 and $50,000 depending on what level of volatility is desired.
In all of the systems in the Narrowneck portfolio, the stops are only active during day sessions. Further, there are often offsetting signals issued by the three systems resulting in a net flat position despite the individual systems being in positions.
The system does not trade during monthly unemployment figures (7:30 am on the first Friday of every month) or periodic FOMC meetings (1:15 pm CST 9 times per year). The developer has, in the past, personally traded through all of the Fed meetings and unemployment announcements - and found that the risk was far more than the potential reward. All contracts are traded in the electronic bond market vs pit. The pit was used prior to Feb 2005; however as volume has shifted to the electronic so has Attain's execution of the system.
Attain Comments:
The Jaws Narrowneck Portfolio takes individual market diversification to a different level. Through the use of multiple systems on different time frames in the same market, the system has the unique opportunity to capitalize on market trends as they develop throughout the day or over several days. Because each system operates independently of one another there is the potential for trades to overlap or offset one another. While some may see offsetting trades as counter productive and same direction trades as added risk it is important to keep in mind that a net flat position is sometimes better than the risk of being outright long or short. In addition, on the rate occasion when all three systems have signaled the same position, it can act as triple confirmation of a b trend.
A key feature to us at Attain is that the system is coded to exit positions prior to Fed announcements and employment reports and remain out of the market during these times - after learning the hard way trading these numbers does not have a very favorable risk/reward relationship.
While in a perfect world, a system would not care whether a Fed announcement was coming out today or not, anyone who has ever watched the bond market immediately following a Fed announcement or employment report will see the wisdom in sitting on the sidelines those days.
Since Attain began trading the systems in November 2003 the bond markets have undergone a significant transformation - from being primarily pit traded to today where 90% of the volume is now traded electronically . In response to these changes the developer has been more proactive than most and now recommends trading the system directly on the electronic in order to minimize slippage.
For those investors interested in diversifying their swing trading portfolios away form strictly stock indices, the Jaws Narrowneck portfolio is a great choice. The system has struggled a bit in the last two months as the bond market has worked its way off of near historic highs, but as always we view the recent downturn as a very attractive time to get started with the system. With its reputable developer, unique logic, and exclusive execution through Attain, we fully expect the Narrowneck Portfolio to finish the year b as it reverts to its average annual return of approximately 23% on a $50,000 investment.
- Jeff Malec
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 |
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Feature | Week In Review | Chart of the Week |
With the majority of the S&P 500 having already reported earnings, last week was a slow week for stock index futures. The markets were very quiet ahead of Friday's unemployment number as traders did not want to get caught on the wrong side of a move in either direction. The number itself was very strong with job growth in July handily beating estimates, however the market took off to the downside anyway as investors took profits on long positions held since July. For the week SP futures barely moved, giving back -0.05%, while NASDAQ futures moved even less falling -0.02%. Small and Mid cap stocks were hit a little harder though with Russell 2000 futures falling -2.62% and SP Midcap 400 futures falling -1.75%.
Higher energy prices played a role in Friday's stock sell off as well. Questions in the Middle East on the new Saudi King and production output problems in the US caused NYMEX Crude Oil futures to finish at their highest level ever at 62.25 per barrel, or up +2.87% for the week. Natural gas futures skyrocketed as well gaining +10.34% last week alone, while unleaded gas +6.15%, and heating oil +3.28% were also up for the week.
Foreign currencies continue to move higher against the US Dollar. Eurocurrency and the Swiss Franc led the way gaining +1.75% and +1.90% respectively. Meanwhile the US Dollar Index fell -1.44%. The metals markets were also moving especially Gold futures which gained +1.61%. Gold is considered a safe haven for investors when the US Dollar weakens against its competition.
Finally, grains continue to be very volatile with no clear trend or direction in sight. The markets moved lower again last week despite the continued dry weather conditions across the Midwest. Corn led the way to the downside losing -5.54%, followed by soybeans which lost -2.58% and wheat which lost -2.36%.
*Day Trading**
While many analysts incorrectly predicted a retreat from the four year highs two weeks ago, last week we finally saw some validity in their forecasts as the market did a 180 degree turnaround and turned bearish. Overall it was a slow week with many traders patiently awaiting the employment report which was released on Friday morning. The choppy conditions caused many systems to not start the month off on the right foot.
A few systems were able to profit from the decline last week. R-Mesa welcomed the volatility on Friday and profited $641.75 for the week when including a break-even trade from Tuesday. Day Breaker took trades on the same two days as R-Mesa, but had more luck earlier in the week. For the week, the system was up $165. RC Miracles was nearly unchanged for the week after profiting just $5 per contract on four trades. Helix ES had similar results, gaining just $2.50 per contract.
Impetus eRL was 1 for 2 last week, dropping -$135.50 per contract. Clipper eRL was quiet, trading just once for a loss of -$178.90 per contract, while Magnitude ES struggled last week, losing -$470 per contract. Not for a lack of trying, the RC Success ES system entered long on 4 out of 5 days last week only to see losses of -$607.50, while the Electric Day Breaker portfolio lost -$677.50 across all four emini markets. Compass, meanwhile, traded three times and was unprofitable by -$1,156.50.
In Blue Wave Trading systems: BWT Zones Russell was active as well last week, trading an average of twice per day for a total weekly loss of -$1,340 per contract, BWT Rock N Russell found the conditions equally difficult to trade and lost -$1,451 per money management unit, while BWT Zones SP got tied up in some long trades that yielded losses of -$2,875 for the week.
**Swing Trading**
Last week afforded one of the first true downward market swings since the stock market started its rally to new YTD highs a few months ago, and swing trading systems were busy trying to keep up with the sudden change of pace .
The trade of the week went to Axiom Index eMD which locked in +$2,138.30 on a long position it had been holding since July 7th. The system also reversed short and was making +$850 in open trade profits as of Friday’s close. Axiom eMD is trading just off of its July equity high and is up approximately 76% (based on a $15,000 account) over the past year in real time. Other active systems included the remaining Axiom Index systems, Eclipse eRL, and Jaws Narrowneck Bonds (this month's System Spotlight).
Axiom entered short the ES, NQ, and eRL markets late in the week and as of Friday's close was posting open trade gains of +$152.50, +$180, and +$20 respectively. Eclipse eRL ended the week +$40 after reversing short from its previous long position for loss, and finally, Jaws Narrowneck Portfolio ended the week +$218.75 after exiting positions on Friday just ahead of the US department of Labor's Unemployment report. For more on Jaws, please see the system spotlight below.
One thing all of the above systems have in common is that they utilize intraday data to crunch their given algorithms, hence when the markets began to sell off late in the week each of the systems was able to capitalize. In contrast, the Tzar family of systems and Mesa Bonds and Notes trade on daily bars and are typically much slower to reverse or change direction on short term trends. Fittingly, those systems held onto their positions throughout last week despite the market moving against them.
Tzar is currently long the eRL, NQ, and eMD while holding short the ES. Individually the eRL was losing -$1,050, the NQ was making +$390, the eMD was losing -$430, and the ES was down -$252.50 in open trade equity as of the end of the week. Mesa Bonds and Notes both held long the entire week and lost -$1,125 and -$875 respectively in open trade losses during the week.
**Long Term**
Long term trend followers have not had many opportunities to trade in the high flying energy markets thus far in 2005 due to the high risk associated with each trade. However, Axiom LT was able to enter long in Natural Gas recently, and the risky decision paid off as the system made +$9400.00 per contract on the long trade. This trade wasn't for the faint of heart though as the system risked $3972.00 per contract at the entry.
Elsewhere trend followers are liquidating long US bond and foreign bond positions en masse as the bond markets continue to move lower (interest rates higher). Andromeda exited a long Eurobund trade for a loss of -$1240.00 per contract and a long Muni Bond trade for a loss of -$912.50 per contract. Aberration Plus also exited a long Eurobund trade, but it was a great trade for the system which made +$2150.00 per contract.
Aberration Plus also exited a long US Dollar Index trade for profits of +$1370.00 per contract. Other systems that continue to hold long include Axiom LT and Andromeda which are making +$695.00 per contract and SEMA4 Symmetry which is losing -$1110.00 per contract. Other system trades from last week include Andromeda entering long in Platinum and SEMA4 Symmetry entering long in Sugar.
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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.