concept, if there was a lotof money involved. We qualified the concept of compounding, becausewe feel small accounts should not expand allocation until their initialequity doubles or triples in size. Even good systems can go in the tankafter a string of winners and if a small account is not compounded,there is money saved up for a rainy day. We have seen small traders double their exposure after they have had a string of winners, just to loseall their money twice as quick when their trading system experiences astring of consecutive losers. If compounding is of interest to you and itshould be if you are trading a good sum of money, you can incorporateit into our capital allocation model with one small change. Instead ofusing initial capital as the Total Capital (TC) in the formulas, use thecurrent portfolio equity.
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241
PLACEMENT OF PROTECTIVE STOPS ANDPROFIT TARGETS
The idea of money management can be built directly into a trading system. Money management at the system level consists of protective stopsand profit targets. The Capital Allocation Model extracted money management outside of the system so that it could be used to define differentportfolios and scenarios. Many traders use protective stops and profittargets to attain their ideal risk/reward ratios. A protective stop is a wayin which the trader has determined his exact risk amount for any giventrade. A profit objective is a means by which a trader tries to attain a certain reward based on his risk. The ideas that we discussed earlier in thischapter centered around normalizing the risk of different markets andallocating funds across a portfolio. These same ideas can be used withsystems that have money management schemes built directly into thelogic. The rest of this chapter shows how profit objectives and protectivestops either degrade or improve a systems overall performance.Table 11.7 shows the performance of an open range breakout systemwithout a protective stop (simply stop and reverse). Table 11.8 showsthe results of the system at different protective stop levels. Notice howthe different markets have different optimal protective stops. A $1,500protective stop in the soybeans does not mean the same thing in theU.S. bonds. Table 11.9 shows the performance of the system utilizing a$1,250 stop. Why don't we use a different stop for each market? The answer is that we don't want to overly curve fit the system by adding a parameter that is different for each market. In addition, a fixed parametersuch as the pure dollar stop, does not evolve with market conditions.The overall performance of the system actually degraded with the useof a fixed dollar protective stop. Table 11.10 shows the system with aprotective stop that changes with market conditions. Instead of using afixed dollar value stop, we used a stop that was equivalent to threetimes the average constant (in this case three) and either added or subtracted the amount from the entry price. This stop outperformed thepure stop and reverse and fixed money management stop. We feel thatany system parameter will perform better if it is dynamic and a function of the market.There is an old saying, "You can't go broke if you take profits,"This statement is true if your risk/reward ratios are set up correctly.If you have a profit objective of $50 and a protective stop of $500, I canalmost guarantee that you will go broke taking profits. Profit objectives can work, if they are sized or placed correctly. Table 11.11 showsthe performance of the same system that we have been testing withdifferent profit objective levels. Most of the markets liked a largeprofit objective. Table 11.12 shows performance of the system with a
242
TABLE 11.7
THE ULTIMATE TRADING GUIDE
Open Range Breakout System (Stop and Reverse Entry-Exit)
ONE CONTRACT PER MARKET PER TRADETEST PERIOD 1/1/83-8/31/99$75 ALLOWED TOR COMMISSION AND SLIPPAGEIndividualMarket
TotalPL($)
Avg PL/Yr($)
US BondsTreasury NoteMuni BondsBritish Pd.Deutsche MarkJapanese YenSwiss FrancUS$ IndexCrude OilHeating OilNatural GasCottonCoffeeSugarSoybeansCornWheatSilverGoldLive CattlePork BelliesLive Hops
86,54034,10063.8407,31345,71354,92544,87522,10046,100-47,55253,660-5.320168.788-5,43236,01022,800-8.11348.665-25,270-20,5567,79615,940
5.1922.0464,5604392,7433,2962.6931,6072,881-2.S535.749-31910,127-3262,1611,368-4872920-1,516-1,233468956
MaxDrawDn($)24,34023,91035,46037.43834,25025,80026,22534,1709,81056.32612.08049.58564. 10628.37025,0258,66321,26333.75541,58026,68425,36410.752
Trds/Yr
Win(%)
31303027292528353131353436373528343835383533
43.944.345.442.343.24343.940.445.639.34437.841.437.639.64039.339.437.738.643.141.4
W:L1.31.21.311.21.21.21.11.4
0.81.511.411.21.30.91.20,90.911.1
Gain/ Mr+DD (%)
19.28.112.21.17.711.69.64.524.3
-4.93S.8-0.614.7-1.18.2
14.9-2.28.1-3.5-4.51.78.1
Summary Performance
Net Profit ($):Maximum Drawdown ($):
642.98886,311
fixed $1,750 profit objective. We picked $1,750 by simply eyeballingthe parameter that seemed to produce the beat numbers across allmarkets. Table 11.13 shows the performance of the system with a protective stop that was a function of the market. In this case, we tookprofits when the market was in our favor five times the average truerange. Again, the dynamic parameter performed better than the static
one.All traders should use some form of protective stop (dynamic stopsseem to perform better). Profit objectives can also help system
TABLE 11.8 Open Range Breakout System (Optimized over Several DifferentProtective Stop Levels)ONE CONTRACT PER MARKET PER TRADETEST PERIOD 1/1/83-8/31/99$75 ALLOWED FOR COMMISSION AND SLIPPAGE
SFSFSFSFDXDXDXDXDXDXDXCLCLCL
CLCLCLCL
HOHOHOHOHOHOHONGNGNGNGNGNGNGUSUSUSUSUSUSUS
DollarStopAmount
TotalPL ($)
1,2601,6001,7502,0005007501,0001,2501,5001,7502,0006007501,0001,2501,5001,7502.001)5007501,0001,2501,5001,7502,0005007501,0001,2501,5001,7502,0005007501.0001.2501.5001,7502,000
50,63855,41357,82554,60015,3702,1604,56014,80018,971)19,55017,39026,93023,24026.66037.23036.17036,87037,170-15,166-23,281-30.908-42,517-36,103-43,768-12,20247,62067,18050,43060.17047,20046,69051,25054,52045,61055,11059,16064,88079,39075,750
AvgPL/Yr
MaxDrawDn
Win
($)3,0383,3253,4703,2761,1181573321,076
1,3801,4221,2651,6211.4531,6662,3272.2612,3042,323-910-1,397-1,854-2,551-2.166-2,626-2,5325.1026,1265,4035.3755,0674,9925,4913,2712,7373,3073,5503,8934,7574,545
20,52522,55022,11325,80033,91040,10043.10036,90033,81033,20035,63016,51013,30012,98010,93010,47010,43010,96027,53132,02137,30046,80147,73764,15551,97910,43010,44012,60011,93016,47015,63011,05018,94024,77026.99020,97021,671)22,84023,800
39.440.441.842.53133.334.937.338.338.839.338.440.742.743.644.244.544.632.635.236.336.537.938.138.238.841.842.543.443.643.643.832.835.838.139.240.341.742.3
TIM($)848890917179868993959581879294969798708084879192938088909294959667747984889293
Gain/ Mr+DD (%)
W:L1.21.21.21.21.1111.11.11.11.11.21.21.21.31.3131.30.90.90.90.80.80.80.81.51.51.51.41.41.41.4
1.21.21.21.21.21.31.3
13.713.714.611.93.20.40.72.83.94.13.48,79.511.11818.118.517.9-3.1-4.1-4.7-5.2-4.4-4.7-4.735.442.432.533.724.725.436.516.11011.1151618.617.2
(continued)
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244
TABLE 11.8
DollarstopAmountTYTYTYTYTYTYTYMBMEMBMBMBMBMBBPBPBPBPBPBPBPDMDMDMDMDMDMDMJYJYJYJYJYJYJY
8FSFSF
5007501,0001,2501.5001.7502.0005007501,0001,2501,5001.7502,0006007501,0001,2501,5001,7502,0005007501.0001,2501,5001,7502,0005007501.0001,2501,5001.7502.0005007501,000
Continued
AvgPL/YrTotalPt ($)($)1.78929,82037.1602.23039,0602.3441.52S25,4601.24620,7702.28538,09038.2602,29643.0103,07253,3303,80963.7703,8414.36161.0503.70151,81062.5604.4694.75666,5903.56621310,0006007,931476-44-3-21,525 -1,292-6.238-3748.32550045.5132.7311,26721.1131,49324.8752,41340,21335,5382,13240,1882,4112,31238,5382,28338,0502,03733,9501,64027,3259,213553771.27527.0381.62213,35080145.5632,73442.0252,6223,20953,488
MaxDrawDn
($)
21,47022.22021,65023,63024.82023.28022,59019.20024,10027,84026,01026.98031.58034.73042.00637,53135.60641.14456.85048.61339.56334,40039,28836,66331,18832,77529,98831,52623,81324,85035,26335,03843.38826.70033,40022,43827,27525,800
Win($)
TIM($)
W:L
Gain/Mr+DD (%)
36.739.141.241.942.443.944.2343840.142.64344.244.525.930.534.835.93637.438.734.736,538.840.741.241.8
7382868890949672798589919294566572788085886976838891939559677479838687647379
1,21.21.21.11.11.21.21.31.31.31.31.31,31.411110.9111.21.11.11.21.21.21.21.21.11.1111.111.21.21.2
7.89.410.16.14.79.29.514.614.71315.712.913.4130.51.51.30-2.2-0.71.27,63.147.46.27.778.77.44.31.50.25,72.211.38.711.7
+1.4
30.333.835.936.937.940.340.331.335.138.1
MONEY MANAGEMENT
245
TABLE 11.9 Open Range Breakout System (Utilizing a $1,250Protective Stop)ONE CONTRACT PER M A R K E T PER TRADETEST PERIOD 1/1/83-8/31/99S75 ALLOWED FOR COMMISSION AND SLIPPAGE
performance, if they are used correctly. Overall, we feel that trailingstops offer the best method of taking profits. A trailing stop will followa market and lock profits in at certain levels. Many times a trendingmarket will retrace a certain percentage before it continues in the initial direction of the trend. Trailing stops give the markets room to gyrate, before taking a profit. These types of stops da not limit the bigwinners as does the profit objectives.
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TABLE 11.10 Open Range Breakout System (Utilizing a DynamicProtective Stop)
TABLE 11.11 Open Range Breakout System (Optimizes over Several DifferentProfit Objectives)
TABLE 11.11
Continued
MONEY MANAGEMENT
TABLE
11.12
Objective)
Open Range Breakout System (Utilizing a $1,750 Profit
250
THE ULTIMATE TRADING GUIDE
TABLE 11.13 Open Range Breakout System (Utilizing a DynamicProfit Objective)
MONEY MANAGEMENT
251
CONCLUSIONWhat does money management, really do for a trader, especially a smallone? The concepts that we discussed here allows traders to customizetheir trading plans an that their capital is used optimally. At the minimum, these concepts can help a small trader think in the terms of riskand reward and hopefully contribute to self-preservation. We have seensome traders retool their entire trading plans, once they analyzed theirtrading system with money management concepts. The ideas that we discussed here are just the tip of the iceberg. There are many books devotedto money management that should be read for a more expansive view ofdifferent concepts and techniques.
12TURNKEY SYSTEMSAND PORTFOLIOS
This chapter presents five different portfolios, ranging from $10,000initial capital to $300,000, to demonstrate the benefit of diversification.We have created different combinations of systems and/or markets foreach portfolio. The systems that we use are the exact systems that wedescribed in Chapter 9. they are:1. Donchian channel breakout2. Moving average crossover3. Short-term open range breakout4. S&P day trade5. Pattern RecognitionPORTFOLIO 1 $10,000 INITIAL CAPITALAt this level, it is difficult to achieve a sufficient level of diversification,but it can be done. We chose the Donchian Channel Breakout systemand traded the Swiss Franc and sugar for this small portfolio. A portfolio of this size limits us to what we can trade; there isn't enough moneyto trade different systems or a lot of different markets. The equitycurve for this portfolio is shown in Figure 12.1. The historical maximum draw down exceeded the initial capita] of this portfolio, but the average draw down was only around $9,000. Unfortunately, the survivalrate for traders with only $10.000 is extremely low. If a trader, at this252
TURNKEY SYSTEMS AND PORTFOLIOS
253
FIGURE 12.1 Portfolio 1—$10.000 (vertical = profit; horizontal = time).
level, hopes to survive for any length of time, he must try to diversifyacross as many markets as possible.PORTFOLIO 2 $20.000 INITIAL CAPITALThe size of this portfolio opens up a lot more potential of diversificationthan portfolio I. We feel that this is the minimum account size for anybody wanting to trade futures and individual stocks on a mechanicaltrading system. Twenty thousand dollars allows room for a system tohave a draw down right off the bat and keep the trader in the market forwhen the system turns around. We chose the same portfolio as portfolio1, but added the Pattern Recognition system trading the soybeans. Theequity curve for this portfolio is shown in Figure 12.2. The two systemsmeshed well together, because of the different trading frequenciesof the two systems. The Donchian system is long-term whereas the Pattern Recognition system is very short-term oriented. The total profitwas $145,764 and the total maximum draw down was $14,693.
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Z54
FIGURE 12.2
Portfolio 2—$20,000 (vertical = profit; horizontal = time).
PORTFOLIOS $50,000 INITIAL CAPITALThis portfolio really opens op the doors of what you can achieve throughtrading futures. At this equity level, several systems and several markets can be traded to increase the level of diversification. We combinedthe three systems trading a basket of different markets. The three thatwe combined were the Donchian system. Pattern Recognition system,and the Simple Moving Average system (Figure 12.3). The following listgives the different markets that we traded on the different systems:Donchian: Swiss Franc, sugar, and crude oilPattern recognition: U.S. bonds, natural gas, and soybeansSimple moving average: Japanese YenAgain the systems meshed well and we had a total profit of $400,347and a total maximum draw down of $21.920.
TURNKEY SYSTEMS AND PORTFOLIOS
255
FIGURE 12.3 Portfolio 3—$50,000 (vertical = profit: horizontal = time).
PORTFOLIO 4 $100,000 INITIAL CAPITALThis account size is usually the minimum that successful CTAs will accept for management. A trader with this type of money has a tremendous opportunity to diversify through many markets and many systems.For this portfolio, we combined the Donchian, Short-Term Open RangeBreakout, Pattern Recognition, and the Simple Moving Average systems trading several different markets (Figure 12.4) The following listgives the different markets that we traded on the different systems:Donchian: Swiss Franc, sugar, and crude oilPattern recognition: U.S. bonds, U.S. Treasury Notes, and soybeansSimple moving average: Japanese Yen and natural gasShort-term open range breakout, crude oil and cornThis portfolio made $472,602 and experienced a maximum drawdown of$26,165.
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FIGURE 12.4
Portfolio 4—$100,000 (vertical = profit: horizontal = time).
PORTFOLIO 5 $300,000 INITIAL CAPITALA portfolio of this size is equivalent to a small institutional sized account. The most successful CTAs will accept only accounts of this sizeor greater. Many large CTAs won't accept a new account unless it is capitalized by at least $1 million. At this level, we were able to use the fullgambit of trading systems that we discussed in Chapter 9 (Figure 12.5).We combined the following systems and markets for this portfolio:Donchian: Japanese Yen, corn, Swiss Franc and sugarPattern recognition: U.S. Bonds, U.S. Treasury Notes, soybeans,and pork belliesSimple moving average: Japanese Yen and natural gasShort-term open range breakout: crude oil, corn, live hogs, and U.SBondsS&P day trade: S&P500The synthesis of these systems and markets netted $785,809 and had adraw down of $37,389.
TURNKEY SYSTEMS AND PORTFOLIOS
FIGURE 12.5
257
Portfolio 5-$300,000 (vertical = profit; horizontal = time].
CONCLUSIONOne level of diversification is achieved by trading multiple markets on asingle system. By trading multiple systems with multiple markets, onecan achieve an even higher level of diversification. Even good systemscan't trade all markets with equal success. We have shown that different methodologies have success on different markets and sectors ofmarkets. For example, the Pattern Recognition system had much moresuccess trading the soybeans than the Donchian system. Hence, moremarkets can be added to a portfolio by adding more systems. If SystemA has success with the U.S. bonds and Japanese Yen, but loses at trading soybeans, and System B has success with beans, then trade allthree markets with their respective systems. In addition, diversificationcan also be achieved by trading the same market on two anticorrelatedsystems. Again, we can't stress the idea of diversification enough. Yourtrading success depends on it!
13TOP TEN SYSTEMS OFALL TIMES
The question that is perpetually raised at our company is: Of all thesystems that Futures Truth tracks, which is the best? Since we are anindependent third-party testing facility, we never answer this question.However, we do advise potential system purchasers to search our tablesfor trading systems that fit their own trading style. While doing so theyshould keep the following ideas in mind:1. The length of a real time track record.2. Consistent performance (not 400% one year and -10% the next).3. The percentage of maximum drawdown to overall net profit.4. Data and computer requirements.5. Open system or black box preference.Searching our vast tables of trading systems could take a lot of timeand effort. In this chapter, we have saved you the time and effort andhave come up with the ten systems that we feel are the best. This listchanges from time to time and may change in the future. We have listedthe top ten systems in order of their general methodology.Breakout SystemsAberration by Keith FitschenDynamic Breakout by George PruittMystery System by Peter AanSTC Vbased S&P Day Trade by Stafford Trading CompanyR-Breaker S&P Day Trade by Richard Saidenberg258
TOP TEN SYSTEMS OF ALL TIMES
Trend Following SystemsBenchmark by Curtis ArnoldDCS II by Peter AanDollar Trader by Dave FoxGolden SX by Randy StuckeyCounter Trend SystemsBig Blue by Vilar KellyTable 13.1 gives the most pertinent facts about each system.
TABLE 13.1
Top Ten Systems
259
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Aberration by Keith Fitschen4241 Pennywood Dr.Beavercreek, OH 4fi430(937)320-1332Aberration is a system developed in December 1993 by Keith Fitschen.It performed well since release date and when hypothetic ally testedback to 1983. We consider his Aberration system among the best in thebusiness. To get the most out of this system, we recommend knowingyour drawdown tolerance before you start trading, and trade Aberrationwith a large, diversified portfolio—as we understand Fitschen doeshimself. This system also works well with international markets. Acomputer is necessary for this system (Table 13.2 and Figure 13.1).
TABLE 13.2
Aberration
ONE CONTRACT PER TRADETEST PERIOD 1/1/83-8/31/99$75 ALLOWED FOR COMMISSION AND SLIPPAGE
TOP TEN SYSTEMS OF ALL TIMES
FIGURE 13.1
Abberation system equity curve.
261
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Benchmark by Curtis Arnold222 S. U.S. Hwy#lSuits 203Tequesta, FL 33469Benchmark is a computerized futures trading system that, has performedwell since its release date in April 1993, It seems to give the best resultswhen used to trade a basket of commodities, approximately five or more.It is a simple longer term trend following system originally designed byTed Shen. Curtis Arnold, developer of the Pattern Probability Systemand author of Curtis Arnold's PPS Trading System—A Proven Method ofConsistently Beating the Market, purchased the rights to the software in1995. This system is similar to Aberration in trading time frame, but isconsiderably different in approach. Benchmark has performed well onportfolios made up of mostly commodities such as soybeans, corn, live cattle, and wheat. A computer is necessary for this system (Table 13.3 andFigure 13.2).TABLE 13.3
Benchmark
ONE CONTRACT PER TRADETEST PERIOD 1/1/83-8/31/99$75 ALLOWED FOR COMMISSION AND SLIPPAGE
TOP TEN SYSTEMS OF ALL TIMES
FIGURE
13.2
Benchmark system equity Curve.
263
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Big Blue by Vilar Kelly and Mike Barna
11 Pinecrest Dr.Flat Rock,