Wednesday, July 7, 2010

TF Daily Swing system update

As a follow up to my earlier post. I would like to add that many of my other systems are beginning the process of building short positions. Additionally, I wanted to put today's loss in perspective for the TF system. This market has whipped around almost everyone except the the best short term systems or the best discretionary traders....and the front-running HFT, Goldman Sachs, JPM, Morgan Stanley etc guys. The Russell Daily swing system is right on plan and should continue to produce good results. This loss is NOT a drawdown it is in fact a well managed trade. The market may possibly probe a little higher tomorrow in the AM but its looking rather like there may just be too many optimists out there. Today, of-course, was a classic short squeeze, lets see if its a bull-trap. I personally suspect it is.

Below is the equity curve including the last trade which gave back around $18,000. This is a good example of how to trade with proper allocations. Trading with systems that give you too many stop outs create the same amount of risk as systems that take too many drawdowns. People's perceptions related to these elements are usually too optimistic. In this model, assigned risk capital is $50,000 and the average trade size is $20,000 or so. Today, we closed a loss on a trade that is equivalent to the average trade size. This loss represents 36% of the at risk capital but the at risk capital represents 20% to 40% of a reasonable allocation. Therefore, to trade this system with $50,000 max trade size in leveraged futures markets the allocation should be roughly $250,000 to $300,000. This loss therefore represents a 5 to 7% move in this allocation. It is common for people to over leverage. Trading involves risk, you do not get paid for feeding the ducks, so you need to think about risk in perspective to an account basis. Given that, we also need to understand that the position taken by this system on the last trade represented about $780,000 of notional equity. That's quite a lot of market exposure. While the system is remarkably successful and trade with 95% winning trades since inception, if one were to freak out over a $15,000 to $18,000 is not because the system is not trading well its related to being over allocated in relation to liquid assets. The results below, therefore demonstrate, an average trade size of less than $20,000 with a max trade size of $50,000 since the inception of the TF futures contracts. There is no reinvestment of profits or compounding. The results represent an annualized return of 26% based on a reasonable allocation of risk capital. Given that at anytime the capital in the market is less than 7% of asset allocation...these results are all the more attractive.

I recommend that people think carefully about how much money they are placing into the market and how much of their liquid assets are required to generate a return. It is my impression that most money managers are WAY over allocated to risk assets.
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