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Archive for June 2009

System trading: Soros paid £1m, you get it for less than $100

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Annual returns in +/- 100% area and corresponding drawdown risk at about 15% is a splendid investment proposal. This is what the best signal vendors offer. For comparision, buy-and-hold S&P stocks strategy has about 10% annual returns with 50% drawdown risk (or more exactly, this was true till Y2008).

Not so long ago such performance would have been dismissed as unrealistic.  Yet track records are independently verified, not dependent on market conditions and the service is available to everybody. The performance is similar to what Nicholas Roditi achieved in the few years prior to Y1998 trading for Soros Fund Management out of his home office in Hampstead, London. Reportedly his annual pay for the work was £ 52 million (i.e. a cool £ 1 million every week). Today the best system vendors deliver about the same performance at +/- $300 per month.

All the facts just scream … it is such a no-brainer that every investors should embrace the opportunities unearthed by system trading. Bank deposits, stocks and bonds seem a game for fools compared to risk/return potential of system trading.

Written by A.S.

June 15, 2009 at 11:22 pm

How many system traders are out there?

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Given the unquestionable benefits, one would expect that millions of investors use the system trading through available internet-based service providers. The actual number of active system trading customers may be a  surprise. My quick-and-dirty estimate is there is only a few thousand active investors who use system trading for investment purposes. By far most of them are small investors with $25k accounts or less.

I draw my conclusion from observing activity on popular system trading interned-based services,, and others.

Fundamental analysis in trading system development

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Noticed this post on SeekingAlpha [thankx to forex_gal for the tweet].

This remainded me of my own research done a few years ago. I didn’t know “the he Austrian school of economics that defines inflation as the expansion of money supply”, but my hypothesis were very similar.

My first presumption was that the inflation measure is M3/broad money supply less GDP growth. The idea was that GDP growth increases the need for more money in circulation to service the economy. So, GDP “neutralizes” money supply effect as a inflation-inducing factor.

My second presumption was that higher inflation induces stronger currency. This comes from observation in the currency markets that higher inflation data usually lead to stronger currency. And academic logic should suggest that higher inflation should mean weaker exchange rate as the inflationary currency gets debased by increased money supply (aka money-printing).

The marketplace reality defies academic logic — higher inflation usually means stronger currency (of course, this applies to low-inflation environment only, but not to hyperinflation). There may be a good explanation. Higher interest rates are generally associated with higher inflation, and such interest rates may be a good deal an investors, but a bad deal for domestic population. The catch is that population can not get out of bad deal (higher inflation and interest rates) while trader/investor can switch in an out of the currency instantly. However, in the long run the currency should decline in line with the money supply differential.

The whole methodology is to project money supply differential and plot it against exchange rate. In the long run, the both parameters should converge. In short term the parameters will fluctuate away from equilibrium in one or another direction.

My finding are that the parameters converge fairly consistently for all the major currencies. In Novermber 2007 our reasearch concluded that, according to this methodology, the British pound is overvalued by about 60% and such overvaluation disbalance has been accumulated over about a decade. In Y2008, GBPUSD declined from about 2 to 1.36 at its lowest point.

Can the methodolgy be used for a valid trading system? Hardly. The problem is that even if fundamental analysis correctly determines the magniture of the disbalance, it has no way to tell when such disbalance is going to correct. As in the example above, GBP disbalance accumulated for about a decade before at least partial adjustement took place. As Keynes correctly noted, “market can remain irrational longer than you can remain solvent”.

If you run a multi-billion fund and make massive macro bet on currencies, to have such fundamental analysis for the merit of second or re-inforcing opinion, is a prudent and professional choice. For small traders/funds, it is beyond limit or merit to maintain such fundamental analysis. They are probably better off by just following some trend-following rules. If the price breaks, just go with the trend. More often than not dumb/uninformed trend-following trade will be as good as smart/informed trend-following trade.

Written by A.S.

June 11, 2009 at 8:43 am

Turtle Trading Rules: Then & Now

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Everyone involved in trading has probably heard about so called “The Turtles” – a well-publicized experiment by Richard Dennis. Some still try to peddle the “turtle trading system” for thousands of $ and generally Dennis/Turtles are mentioned as evidence that trend-following works.

The rules are published in a book and and on web pages by persons who seem to have authentic information.

I Y2006 I did backtest “the turtle trading rules” on several markets. The conclusions are very straightforward.


The turtle trading system produced phenomenal profits till about mid-80’s. Even trading 1 contract as a base position, each market shows millions of dollars in profit.

The chart below is the performance of USDCAD contract.


In about 10 years [1976 to 1985] even trading 1 contract in USDCAD would turn $100k into nearly $4 million – an astounding 40 x increase. So the claim that Dennis became very rich by following these simple rules is possibly true.


Somehow the system stop to perform in all the markets in 1987-88 period, except for GBPUSD which shows postive returns till 1991. In no market the system has reached a new equity peak since 1991. Most show steadily negative or haphazardly flat performance for the last two decades. This may explain why Dennis reportedly finished his career with a loss of about 1/2 of the equity.

The Turtles may have its place in the annals of trading history, but the turtle trading rules are less than useless in today’s market. It’s snake-oil of trading. I wouldn’t trust anybody who promotes it as a valid trading system.

Written by A.S.

June 8, 2009 at 12:03 am

Technical risks in system trading [updated]

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In system trading there are still plenty of technical risks. If you use your own mechanical trading system and autotrade it from Tradestation, the chances are that it will run reliably. Even Tradestation got to this level only in the recent years and was prone to mistakes earlier.

However, once you decide to buy trading signals from a system vendor, you’re exposed to a plethora of technical risks. In terms of reliability system trading support applications are probably where banking software was 15 years ago or worse.

Most of the problems take place in trader-to-server part of the process and are not visible to customer. Much less problems are in server-to-broker routing and such problems are easily detected by the customer. Like in this example given below:


EURUSD trade placed with 33 pip stop trades at 80 pip loss and the stop is not activated. [Update: Ultimately the trade is booked correctly with 33 loss and the only failure seems to be to remove the trade from open positions log. Confusion is better than hard loss, but the situation leaves lingering doubts about the reliability of the system.]

Conclusions? Any major fully automated system trading operation still needs to be supervised. If no supervision, allocate reserves for technical risk.

Written by A.S.

June 3, 2009 at 10:22 am