Fixed trading system has us on track...

Monday, October 03, 2005

The month of September produced solid gains in every market we follow. The Russell emini went undefeated the entire month. Not a single losing trade! September: S&P eMini +11 points Russell eMini +16 points OEX options +$980 (based on 10 contract lot) The same question has filled our inbox recently so we thought it would be appropriate to answer via our trading log for everyone to view. QUESTION "What happened in June & July to cause back to back losses?" ANSWER We spent a great deal of time researching our strategies to find a reason for the poor performance. Several complicated methods were used but nothing concrete developed. Then as if a light turned on, we discovered a simple, yet essential, flaw in our system. In 2003, when this system was developed, the actual price of the S&P Futures was approximately 900. As of today's price the contract has risen 37%. Therefore, we applied a filter to our system which basically inflates key numbers by 37% and the results are in-line with our historical averages. Sometimes it takes a catalyst such as June & July to uncover flaws. To make our find conclusive, we back-tested the system using this filter and we found the results to be much better. Obviously the results were identical when we tested them in 2003 because the filter did no inflation because that's when price was at approx 900 (0% difference). As price moved higher over time, we did see changes in actual numbers but for the most part the results were the same. It wasn't until this summer where we witnessed elevated levels of volatility that a flaw was evident. Much of the evening & weekend hours in late July were spent working to correct this problem. Once testing was completed, we immediately began using this filter and August produced a hefty gain of 39.50 points. This number is higher than average, but historically we produced 25 points per month using the identical system. With this filter in place it will not be long before this once again becomes fact. We prefer to let actual results speak for themselves but felt it was appropriate to make this public announcement. It has certainly reduced in-house stress levels because we no doubt have an outstanding trading system. When you begin to lose using this system, it makes you wonder whether the edge has been lost. Luckily we were quick to find the hole and apply the patch which has us back on track to stellar gains.

posted by OEX : 1:13 PM