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System Spotlight: .Mesa Notes & Mesa Bonds

June 13, 2005

 

There are a lot of swing trading systems out there which attempt to hold positions for a few days to a week, but nearly all of them concentrate solely on stock index futures. Despite the importance of diversifying a portfolio with a swing trading system operating on markets other than the stock indices, it's rare to find a swing trading system that works on different markets, But two such systems have been traded for clients at Attain for over two years.

That's right, there's over 50 combined months of actual client fills on Mesa Notes and Mesa Bonds, and as you may have guessed form their names - both trade something other than stock index futures. With both systems doing quite over the past year during the move up in bond prices (down in interest rates) that's confused even Alan Greenspan, this month's system spotlight is on swing trading systems Mesa Bonds & Mesa Notes.

Who is the Developer?

The Mesa Bonds & Notes systems were developed by renowned technical analyst John Ehlers

'Mr. Ehlers received his BSEE and MSEE from the University of Missouri and did his doctoral work at The George Washington University, specializing in Fields & Waves and Information Theory. John has been a registered Commodity Trading Advisor since 1997. He is a recently retired electrical engineer and has been a Senior Engineering Fellow for some of the largest Aerospace Companies in the world.

As far as his career developing trading system, Mr. Ehlers has been selling popular MESA technical indicator package to active traders since 1984. His software has received 25 Readers’ Choice Awards from Stocks & Commodities magazine, and been ranked in Futures Truth Top Ten rankings several times.

Mr. Ehlers is continuously researching and testing new theories and methods of approaching the stock and futures markets, and is not shy to share his insights - having been a frequent speaker at conferences and seminars worldwide and penning many articles and books.

He has been a contributing writer for Stocks & Commodities, Futures, and Active Trader Magazines, and authored three books on technical analysis based trading: "Mesa and Trading Market Cycles" (first and second editions), "Rocket Science for Traders", and his newest release, "Cybernetic Analysis for Stocks and Futures". Attain Capital is happy to send copies of all three books to any newsletter readers interested in opening an account to trade any of the Mesa systems.

John Ehlers is currently the President of MESA Software and continues to actively trade using the various systems and indicators he has developed.

How does it Work?

Both the Mesa Bonds and Mesa Notes systems utilize the MESA cycle logic present in all of developer John Ehler’s systems. The developer believes many natural events and processes are cyclical, including seemingly random market prices.

The mathematical engine in MESA cycle theory is the Burg algorithm. (Ph.D.. Thesis by John Parker Burg, Stanford University, 1975) This algorithm has been used in MESA programs since 1978. The mathematical procedure is rather complicated and the MESA programs compromises some generality to achieve ease of operation. For example, the order of the mathematical filter is fixed relative to the data length.

The MESA logic models the market as a generalized filter. This filter is driven by a white noise generator. (White noise consists of all frequencies with a uniform power amplitude.) The output of the filter is compared with the samples of actual market price data. The result of the comparison is fed back to adjust the filter so that, ultimately, the filter output is a good replica of the true data in the time domain, within the constraints of the filter. The length of data used to tune the filter can be selected independently from the filter characteristics.

The robustness of MESA BONDS arises from the simplicity of the Burg algorithm mentioned above combined with the following two constituent components.

  1. Volatility Measured as the position of the current closing price relative to the highest high and the lowest low over the last "N" days look back.
  2. Cyclic Component Filtering which is accomplished by a second order Gaussian high pass filter.

The trading principle is that, in the short term, prices will revert to the mean after they are at a cyclic peak. The buy signal is a limit order to further capture the maximum price swing and to often get negative slippage. The sell signal is symmetrical except that the upper threshold is independent of the lower threshold.

If enough traders ask themselves "Will the market go up today?", the random variable is direction. Thus, conditions are established for the solution of The Diffusion Equation. On the other hand if enough traders ask themselves 'Will the trend continue?', the random variable is now momentum. You could then expect the conditions to be established for the solution of The Telegrapher's Equation. That is, the market is ripe for short term cycle activity. MESA attempts to measure these short term cycles as they form.

Both Mesa Bonds and Mesa Notes utilize daily data for their signals, and have a "pay with profits" plan available where new investors don't have to pay for the system until they have made the $1,995 system cost in closed trade profits.

Attain Comments:

Quick - What system has had the highest percentage return at Attain over the past 12 months? Compass? Nope. Blue Wave? Nice try. It's Mesa Bonds, which has posted a return of 45.1% over the past 12 months to lead all other systems. Now, you hear us say in this space time and again not to chase the best performing system, but the Mesa Bonds story is different. You see, 12 months ago, Mesa Bonds was down and nearly out after staring a nasty drawdown in the face.

But, while Mesa Bonds was in the midst of a 75% drawdown, its sister system Mesa Notes was posting gains. The portfolio of Mesa Bonds + Mesa Notes had not eclipsed its stop trade drawdown level, thus many of our clients kept trading the pair. Diversification is not just a fancy word, it helped investors trading Mesa Bonds hold on through the drawdown - as the portfolio of the two systems only experienced about half the Drawdown of Mesa Bonds alone.

The result has been nice gains over the past twelve months, and actually since we began tracking both system in April of 2003. Mesa Bonds does have a great deal more volatility than Mesa Notes, but the pair works very well together, often with one short and one long or vice versa, thus creating a sort of market neutral strategy. The systems also have some counter-trend logic and correctly picked the move down in interest rates this year (when interest rates fall, bond prices go up), while the rest of the world seemed to think interest rates were headed much higher.

The tables below show the model account performance of both Mesa Notes and Mesa Bonds singly, as well as a combined equity curve and statistics on a portfolio trading both system together in the last chart and table. You can see that the Sharpe, Sterling, and Sortino ratios all go up when combining Mesa Bonds with Mesa Notes.

With most portfolios heavily weighted towards stock index futures in the swing trading portions of their portfolios, the Mesa Bonds & Notes programs offer valuable diversification in the swing trading space and nice performance to boot. With a pay with profits plan and well respected developer behind them, there's a lot to like.

- 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   |  

Chart of the Week : Mesa Notes/ Mesa Bonds Performance Summary

Feature   |   Week In Review   |   Chart of the Week   |  

Mixed performance across the three major stock indexes led to choppy market conditions throughout last week. SP 500 futures squeaked out a small gain of 0.40 points despite strong economic indicators and earnings news. Most of the gains were limited by NASDAQ futures which fell -1.70%. Surprisingly Russell 2000 futures shook off the tech weakness and gained 1.10% for the week.

Crude oil futures continue to be very volatile, this past week the market moved in favor of consumers as oil prices fell -2.95%. However, the honor of the most volatile week goes to the coffee market, which saw prices drop an astonishing -9.99%. Historically trend followers have had difficulty trading coffee and this past week gives a good indication why.

Grains turned back around and moved lower this week after rising the week before. Corn was the most volatile market falling -3.78%, followed by wheat which was down -3.02%, and soybeans which moved -1.33% lower.

Finally, US treasuries took a small breather falling -0.50% for the week marking the second week in a row bonds finished lower.

**Day Trading**

Last week saw several days whose strong trends in the morning unfortunately turned around by mid-afternoon - sending most trading systems chasing their tails. Several systems utilize counter-trend logic- meaning they might not jump into a long trade on a strong up day but wait for a reversal to the downside to enter short- but even those systems found it tough to make substantial profits for the week.

BWT Zones SP has been on fire since the recent update, and tacked on another $3,250 for the week after a great Tuesday trade. BWT made $2,325 on Tuesday as it went long near the lows of the day and then sold the rally and watched as the market came falling all the way back down.

Elsewhere, R-Mesa broke out of its recent drought and was profitable by $687.50 on three trades last week, while the Electric Day Breaker portfolio racked up $1,170 in profits across all four markets-the majority of which was made on Thursday. Clipper eRL was profitable by just $30.70 per contract after a nice reversal trade on Wednesday followed by a winning trade on Thursday to break back into the positive.

On the losing side of the ledger, Day Breaker traded twice unsuccessfully for a loss of $1,350 and Compass also ended up on the losing side of the coin, losing $879.25. AG Xtreme traded three times last week but was unprofitable to the tune of $825. RC Success and RC Miracles lost $480 and $840 respectively " with RC Success trading just once compared to eight times for Miracles. BWT Rock N Russell closed the week on a sour note with losing trades both Thursday and Friday and lost a total of $2,319.80 using the position manager for the week.

The Founder systems were all unprofitable for the week. Generally, Helix ES will make out like a bandit with the choppy conditions but had no such luck this week losing $447.50 per emini contract. Cipher ES and Magnitude ES both were active for the week but were unprofitable by $690 and $502.50 respectively.

**Swing Trading**

Swing systems using a shorter time frame were beat up last week in the choppy trading conditions. The good news is that eventually these types of systems will find a trending market and ride it out to make up for the small losing trades incurred during the consolidating periods.

The Axiom Index system saw the ES and NQ markets very active last week while the eRL and eMD markets held their course. Axiom ES got the worst of it-acting almost like a daytrading system as the inability of the S&P market to break out of its range one way or another led to several reversal and total losses of $1,815 per contract.

Axiom NQ had mixed results with one small winning trade and a larger losing trade for a total loss of $352 per contract but was holding short for open trade profits of $210 as of Friday. Axiom eMD and eRL both were holding long for open trade profits of $1,630 and $2,715 as of Friday including the rollover trades. The difference in the four markets highlights the importance of being diversified across all four.

Eclipse eRL has been holding long for almost a month and has $3,201.70 in open trade equity including the rollover. The Tzar system was holding short last week in the eRL and finally bailed out on the trade for a loss of $2,779 per contract. On the other side of the coin, Tzar eMD has been long and is making $1,375 in open trade profits. Tzar NQ is holding long for open trade profits of -$469 per contract. Tzar ES has been on the sidelines for a few weeks now-and will look for an overbought/oversold condition to jump into the market.

The bond markets have started to finally reverse their course and Mesa Bonds timed its reversal to a short position nearly perfectly. (For more on the Mesa swing trading systems - see this week's System Spotlight below) The system is making $1,168.75 on the short trade in open trade equity, the bulk of which was made last week. Mesa Notes continues to hold long with open trade profits of $2,996 per contract on all three legs of the trade but saw some of the profits disappear in last week’s sell-off.

**Long Term**

Long term performance was mixed last week as increasing gains in short foreign currency positions were offset by profits in long bond positions decreasing as treasuries moved lower.

Axiom LT has been one of the top performers in the foreign currencies, holding short positions for open trade profits per contract of +$5687.50 in the Swiss Franc, +$1331.25 in the Japanese Yen, and +$3555 in the US Dollar Index (a long position).

Likewise Andromeda and Aberration Plus are active in the foreign currencies as well. Andromeda is holding short for profits of +$8831.25 per contract (open trade) in Eurocurrency and holding long in the Dollar Index for gains of +$2675.00 per contract (open trade). Aberration Plus has been holding long in the Dollar Index for profits of +$2330.00 per contract, long in the Mexican Peso for profits of +$625.00 per contract, and short in the Canadian Dollar for a loss of -$720.00 per contract.

Cotton has been another popular market as it continues to trend lower. Aberration Plus entered late last week and is making +$105.00 per contract (open trade), while both Andromeda +$670.00 per contract (open trade) and Axiom LT +$1585.00 per contract (open trade) have been holding for a longer period.

Finally, the only closed out trade from last week was Andromeda exiting a long five year note position for a loss of -$186.00 per contract.

Please Login to: http://www.attainaccess.com for the latest updated statistics.

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   |