Algorithmic Trading Results - Trizen Systems, Inc.

Issue: #105

5/15/2010

Hello and Welcome,

Welcome to the new Trizen Systems newsletter. This will be the new format for discussing our algorithmic trading systems and other information. Weekly updates will include Actual Profits/Losses, Commitment of Traders, Articles and Actual Trading screen shots. Pass this along to anyone that you feel would like to understand more about the financial markets, derivatives, and how to trade them successfully.

Since trading commenced (Feb. 1, 2010) as reported by our Broker:

Retrun on Initial Capital: 6.00%

Annual Rate of Return: 20.82%

Buy & Hold (S&P Index): 1.29%

We are currently above the S&P index by 4.71%

Unprecedented Market Action

Weekly Profit (P/L): -$321

Another dramatic week with the European Central Bank announcing a nearly $1 Trillion "bailout" package for its member countries with financial difficulties. The market raced 4% in a single day. Though we were short through the week were able to recover the vast majority of the losses by the end of the week. Monday's announcement caused a "hedge" condition. The "hedge" reduced additional profits and the test of the new Version 3.6 Short Only strategy during massive rally in overnight trading reduced additional profits.

BladeTrader Version 3.6 performed well even through an incredible rally starting Sunday evening. We will open a second account this week to handle the BladeTrader Version 3.3 Volume Only which was used the week prior and offers a different view to the both the Long and Short trading strategies and trades only active hours.

Overall, the system is trading well; we have modeled these types of announcements in prior years so though it was difficult to take such a hit on Monday, the sell-off covered the gap and the market continued its "fundamental" direction.

Commitment of Traders

Bulls-n-Bears

The COT, or Commitment of Traders, represents a government report that collects all the open positions for all traders in the futures market. It breaks it out into Hedgers, Professionals, and Small Traders. This week's COT for the S&P continues to show a net short position for Professional traders (Blue) while Hedgers seem to be neutral (Red). In most cases the Small trader (Green) is a contrarian indicator.

Analysis: The Hedger has shorted in massive amounts last week (possibly one effect of last week's large drop). The professional trader is on the sidelines while the small trader is buying. In general portfolio managers are NOT selling their portfolios short but are ramping up protection. Continuing a defensive portofolio is recommended.

Algorithmic Trading

Stop Losses and Performance

Are stop losses good? For most traders stop losses are a prerequisite to trading by most brokerage firms; however, it seems that most brokerages say the same thing about stop losses: "Just set it really far away." What does this mean? It means that stop losses are required but negatively impact performance. In general stop losses that are too close to the price will continually get hit while stop losses that are too far away won't get hit and insolvency comes into play.

So, where do you place your stop losses? You must analyze your strategy and run an optimization against a range of stop losses over years of data. In general, stop losses are good only in protecting capital, but they are generally bad for overall performance. This min/max scenario of minimizing losses while maximizing performance can be really difficult but a fundamental requirement to algorithmic trading.

For every modification of an algorithm expect to run through at least four years of data to confrim that it hasn't modificed your stop loss estimates. Its also good practice to revisit stop loss placements to make sure market conditions have changed so dramatically that they become obsolete. For instance, in the early 1980's a stop loss of $500 might have been good, but today that might get hit in a few seconds of entering each trade (which would decimate your account instead of protecting it). In our analysis and modeling and reviewing the stop losses of other systems, the S&P has a range of stop losses on a daily chart of at least 20 points and is typically in-line with the VIX. As the VIX moves higher, stop losses might have to be moved as well since volatility will trigger stop losses and then reverse direction (See May 6th and the so called "Flash Crash").

At Trizen Sysems, we specialize in medium frequency trading which incorporates elements from HFT and fundamental strategies. This type of trading reduces commission charges, sliippage expenses (getting a bad price), and offers both long and short strategies and we only recommend the things we actually trade ourselves. Why trust anyone who doesn't trade what they recommend?

Actual Trades for 5/14/2010

The Market Takes a Beating

We only recommend what we actually trade. Here is a screen shot of our automated system in Action and the actual trades.

On Monday our "all hours" trading strategy was stopped out at -$1500 but recovered nearly all week's losses in a single few trades as shown below.

Sincerely,

Edward Zaremba
Trizen Systems, Inc.

Commodity Trading Advisor

In This Issue

Market Action

COT

Algorithmic Trading

Actual Trades

BladeTrader Version 3.6

Version 3.6 was released this week and traded through all 5 days. This is an "all hours" strategy.

Quick Links

www.trizen.com

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