Trading System Seminar Handout
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Trading System Seminar Handout

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Trading System Seminar Handout Trading System Seminar Handout Presentation Transcript

  • Strategic Trading Systems, Inc. Checkmate, Synergy, Fusion & Interplay Trading Systems and Rotational Advisory Service ™ Copyright 2006 Strategic Trading Systems, Inc. All rights reserved (not for distribution)
  • Risk Disclosure
    • COMMODITY TRADING involves high risks and you can lose a significant amount of money. Commodity trading is not suitable for many investors. Any performance results listed in all marketing materials represents simulated computer results over past historical data, and not the results of an actual account. All opinions expressed anywhere on this website or media are only opinions of the author. The information contained here was gathered from sources deemed reliable, however, no claim is made as to its accuracy or content. Different testing platforms can produce slightly different results. Our systems are only recommended for well capitalized and experienced futures traders.
    • CFTC REQUIRED RISK DISCLOSURE
    • 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 IN 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 OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS .
  • Why Trade Futures?
    • Extremely unique asset class, low correlation to other investments. (more on this on next slide)
    • Highly Regulated Industry, (NFA &CFTC)
    • Very liquid marketplace (get in and out easily) with transparent prices (Internet quotes etc.)
    • High Leverage (Double edge sword that is a huge benefit when handled properly). Gives potential for much higher returns (and risk)
  • Modern Portfolio Theory / Efficient Frontier – The Scientific case for adding futures to your portfolio.
    • 1990 Nobel Prize Winner Harry Markowitz (in the Journal of Finance, in March 1952) He demonstrated that investors failed to account correctly for the high correlation among security returns. It was his position that a portfolio's risk could be reduced and the expected rate of return increased, when dissimilar price movements were combined. Holding securities that tend to move in concert with each other does not lower risk. Diversification, he concluded "reduces risk only when assets are combined whose prices move inversely, or at different times, in relation to each other."
    • Dr. John Lintner of Harvard University, 1983 landmark study Lintner wrote that "the combined portfolios of stocks (or stocks and bonds) after including judicious investments…in leveraged managed futures accounts show substantially less risk at every possible level of expected return than portfolios of stocks (or stocks and bonds alone." Lintner specifically showed how futures can decrease portfolio risk, while simultaneously enhancing overall portfolio performance.
  • Efficient Frontier
  • Reduced Correlation Example In Simple Terms
  • Why Use Trading Systems
    • Need a researched game plan.
    • Estimated that over 80% or retail investors lose money trading futures on their own.
    • Emotions of fear and greed and panic are hard to control.
    • Something thoroughly researched and tested gives confidence and emotional control.
    • Most Successful commodity fund managers admit that they use trading systems to control risk and earn profits.
  • Best Method = Trend Following
    • WHY? Because it works!
    • Richard Donchian popularized these methods in the 1960’s.
    • Billions of dollars being professionally & successfully managed with this type of approach
    • Richard Dennis (famous trader who reportedly made several hundred million dollars starting with just a few hundred dollars taught this simple method)
    • Turtles (A group trained by Dennis were in many cases able to recreate Richard Dennis’s success after being taught his trend following system) Many have become some of the worlds most successful traders. Although many admit they have advanced and modified the concepts.
    • I Have never seen short term trading work over the long run. (Day Trading etc.)
  • Why does trend following work and how do you do it?
    • Commodity prices are prone to sustained long term price movements. (Kurtosis, Non Normal Price Distribution, see example next slide).
    • Trend follow adheres the old adage of cutting your losses short and letting your profits run.
    • The challenge is to identify when a market has begun this type of sustained move and then control the risk.
    • Don’t need to be right a high percentage of the time if winners are bigger than losers.
  • Why Trend Following Works
    • We know the source of return to trend-following techniques results from sustained market price movements. Examination of recent and past data demonstrates empirically similar sustained price movements. Statistical examination of the distribution of prices also is similar over large enough data samples in that the kurtosis or “fat tails” is also similarly present. From a fundamental perspective, we could summarize the majority of return opportunities falling into several categories: macro-economic changes such as interest rates, asset values, inflation rates, and relative currency valuations taking place over months to years; physical supply and demand imbalances such as for commodities including seasonal stress factors taking place over weeks to months; and short-term market phenomenon such as liquidity contractions generally lasting from weeks to months. The common thread woven throughout these is the sustained change of price resulting from future unknowable events. Human reaction to such events, and the stream of information describing them, takes time and runs its course unpredictably. The resulting magnitude and rate of change of price is not reliably foreseeable [which is why trend following works].
    • Patrick L. Welton Welton Investment Corporation
  • Kurtosis “Fat Tail” Example (Trade Outcomes Simple Trend Following)
  • System Robustness – What's needed
    • Non Optimized
    • Single Parameter
    • Input values can be changed without significant impact
    • Proper slippage accounted for
    • Trading Liquid Markets
  • Robust System Logic Example - Checkmate
    • Checkmate’s trading logic is based on the premise that simple rules and a limited number of parameters work best. There are 5 basic concepts in Checkmate’s trading logic.
    • The first set-up phase of Checkmate establishes the presence of a mid-term directional bias. Checkmate will never go long during a medium/long term downtrend or go short during a medium/long term up trend. Once this underlying directional bias has been confirmed Checkmate then goes to step two.
  • Robust System Logic Example - Checkmate
    • In step two Checkmate attempts to filter good trends from bad ones. Steps two and four are the truly unique parts of Checkmate. Checkmate does not believe that all trends are created equal. Sometimes breakouts are just meaningless fake-outs and unlike many trend following systems Checkmate attempts to filter these out. This is also why Checkmate tends to be in far fewer trades than other trend following systems following the same markets. This process is done with a fairly complex algorithm that looks at a number of different characteristics about the markets recent price action. If the proper price action and conditions are then met Checkmate will generate a signal to buy or sell.
  • Robust System Logic Example - Checkmate
    • Step three is the placement of an initial worst-case stop. This is the approximate amount of maximum risk within the trade. It’s only approximate because we don’t yet know tomorrows opening price and can’t always count on our stops being filled at the exact price etc. It is this stop that is used to compute your position size. It’s a dynamic stop that takes into account each markets individual “weight”.
  • Robust System Logic Example - Checkmate
    • Step four is trigger points that Checkmate uses to pull in its stops extremely close. In our testing we have found certain market characteristics that can signal the exhaustion of a trend. Once this has been identified Checkmate goes into a very defensive mode of attempting to lock in profits fairly close to current levels. However, even this stop still gives the market some breathing room should the trend continue immediately higher.
  • Robust System Logic Example - Checkmate
    • Step five is the final trailing stop. If none of the triggers are hit in step four then Checkmate will still trail the market with a longer-term stop. Once this stop is hit it signals to Checkmate that the longer term trend is exhausted and will now restart the setup cycle for a new trade.
  • Robust System Logic Example - Checkmate
    • As you can see, Checkmate is relatively simple in its concepts. However, it is the unique combination of these concepts that gives the system its powerful edge.
  • Trade Examples Checkmate
  • Futures Truth Inc. An independent third party evaluator. They just added Checkmate to their list of the top ten most consistently profitable trading systems.
  • Testimonials
    • January 13, 2004 Dear Dean, I just realized that the two-year anniversary of my starting to trade ‘Checkmate” has just passed and I wanted to thank you once again for all the help and support you have given me during this time. I am, obviously, delighted with the way that the system has performed exceeding my expectations in every regard. I find that the system has very reasonable draw-downs and normally exits a position without giving back too much of the open-trade profit. I agree with you that “Checkmate” is an excellent system to trade alongside “Aberration” because the results are not highly correlated. Best wishes for a happy and healthy New Year.
    • Dr. Ron C. Boca Raton, FL
    • January 15, 2004 Dean, Checkmate has been my primary trading system since January 2002.  I have designed and purchased many systems over the past 10 years, but none have proven to be as robust as Checkmate.  Most of the systems I have traded or researched turned out to be over-optimized methods that lose money in real time trading.  The primary factors that drew me towards Checkmate were the low draw downs relative to returns and the non-optimized parameters.  Prior to trading Checkmate in real-time, I did a very thorough analysis of the system with my own data.  The system proved to be very stable even when the parameters were varied.  Checkmate also held up very well in a Monte Carlo simulation.  All of my testing results were closely correlated with your published back testing data. Thanks for designing a great system that is non-optimized, easy to trade, and has a low draw down. Don H. Edgewood, WA
    • Testimonials are not indicative of future performance and may not be representative of the experience of other clients. Factors such as start date, portfolio selection, money management etc. will cause variations in individual performances.
  • Testimonials
    • March 19, 2004
    • I have been trading with Checkmate for just under 1 year and have a broker who automatically executes my trades.  I am really pleased with the results, both overall, and along the way. Although I am new to trading with money in the market, I did work seriously on the subject for about 10 years at one time.  In that time period, I didn't come up with a system that I was willing to trade.  I find Checkmate to have the best market entries I have seen and couldn't be happier with that.  On exits, I have called my broker on several occasions about getting out and find Checkmate either has just gotten me out or has a stop that will be hit at any moment.  Because of this, I am developing confidence that I can be at work or go out of town while in the market and not fret about what is happening all of the time.  I find Checkmate to be an excellent way to diversify my portfolio in this time when the stock market hasn't treated me very well.  Thanks for making this tool available, Dean.
    •  
    • Bob R. Mesa, Arizona
    • Testimonials are not indicative of future performance and may not be representative of the experience of other clients. Factors such as start date, portfolio selection, money management etc. will cause variations in individual performances.
  • Correlation, the case for multiple systems
    • Just as modern portfolio theory teaches us the benefits of having uncorrelated asset classes it also helps understand the need for reduced correlation systems trading together.
    • Checkmate it mid term, Synergy is long term. Created “Synergistic” results.
  • Correlation
  • Synergy Trading System Concepts
    • Synergy trading logic is based on the premise that simple rules and a limited number of parameters work best. There are 5 basic concepts in Synergy’s trading logic.
    • The first set-up phase of Synergy establishes the presence of a long-term directional bias. Synergy will never go long during a longer-term downtrend or go short during a longer–term up trend. Once this underlying directional bias has been confirmed Synergy then goes to step two.
  • Synergy Trading System Concepts
    • Step two is based on breakout type of logic. Once Synergy has established an acceptable direction bias it then seeks out confirming price action in the direction of the trend. The price action Synergy is looking for is something out of the ordinary. Synergy is specifically seeking a confirming type of acceleration within the trend as an entry signal. Once an entry signal is established Synergy moves to step three.
  • Synergy Trading System Concepts
    • Step three is the placement of an initial worst-case stop. This is the approximate amount of maximum risk within the trade. It’s only approximate because we don’t yet know tomorrows opening price and can’t always count on our stops being filled at the exact price etc. It is this stop that is used to compute your position size. It’s a dynamic stop that takes into account each markets individual “weight”.
  • Synergy Trading System Concepts
    • Step four is profit target levels. After the trade has been established Synergy starts computing dynamic levels to exit part of its position. These partial exits within the longer-term trend can significantly reduce overall volatility in performance. It should be noted that Synergy will only make partial profit target exits. It’s important to never miss a big trend and for this reason Synergy will always hold its remaining position until the trailing stop (step 5) is reached.
  • Synergy Trading System Concepts
    • Step five is the final trailing stop. This is a long-term exit that waits for confirmation that the trend has exhausted itself.
    • Because Synergy uses relatively tight stops and partial exits it takes very strong advantage of position sizing. The real money is made when you have on a large position in a big trend. Furthermore, exiting the trend at incremental points can lock in profits for shorter-term moves and smooth your equity curve in longer-term volatile moves.
    • As you can see, Synergy is relatively simple in its concepts. However, it is the unique combination of these concepts that gives the system its powerful edge.
  • Trade Example Synergy
  • Performance Evaluations
    • Results computed with Trading Recipes for windows.
    • Trading Recipes For Windows is the worlds most advanced system testing software, costing over $25,000 per copy.
    • Recommended to me by “Market Wizard” Dr. Van Tharp
  • Realistic Performances – What to Expect
    • Return of 1.5 to 2.5 times risk (MAR Ratio)
    • After 10 years of research and seeing countless systems trade in real time I believe that anybody that says anything does better than this is lying or curve fitting (optimizing) or lucky and due for a nasty “correction” in their thinking.
  • Other Performance Measures
    • Longest Draw downs
    • Deepest Draw downs
    • Other performance Ratios
      • Sharpe Ratio
      • Return Retracement Ratio
      • Sterling Ratio
      • Monte Carlo Simulations
      • Start Trade Drawdown Reports
  • Why Synergy, Checkmate and Fusion
    • I believe that based on a confluence of factors they represent some of the best systems available for sale.
    • Better performance ratios than anything I'm aware of on an apples-to-apples basis (discarding curve fit systems or “Cherry Picked” scenarios etc.)
    • I personally had a fund manager offer me up to 10 million in equity to pull my systems ff the market and trade for him. He thought I was selling “dollars for pennies”. Unfortunately he would have “owned me” afterwards. Decided to pass and continues making systems available to public
    • I Trade all my systems with my own funds.
    • You get the benefit of over 10 years of research.
  • Lets go to performances
    • Please navigate to Microsoft Excel Reports from Trading Recipes.
    • Make decision if the Risk-to-Reward ratios mesh with you desires and tolerances.