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Serious Investment Returns

These days it seems most websites are full of page after page of overhyped sales drivel. I’m not going to insult your intelligence or waste my time with such rubbish. So let’s skip the usual preamble and just cut to the chase…

$87,979 profit per $1,000 risked per trade

This is the performance from our first 29 months since the S-I-R system went live. Most orders may be placed each evening ahead of time. With this system there is no need to follow the markets throughout the day. In fact I know from my own experience that it is far better not to look too closely at these trades during market hours. On average we take 8 to 12 new trades per month which typically last for 3-8 days before being closed out.

How was the S-I-R system invented?

S-I-R was originally developed for use in the hedge fund that I run as my primary business.  In the fund we have historically traded the S&P500 futures as short-term liquidity providers.

In 2008, while the markets were in meltdown I was concerned that 2009 would be a difficult year in the S&P. After such an extreme move there follows an almost inevitable “hangover” as the market tries to return to some sort of normality, but with much reduced volume as so many major players leave the market forever due to under-performance or bankruptcy. In this type of trading we earn best when the market has good volume and volatility. However, both of these can be expected to decline during a hangover.

So in the summer of 2008 I started thinking about adding another element to our trading activity, just in case 2009 turned out to be a hangover year – which of course is exactly what did happen!

What I did was I took exactly the same model I use for trading the S&P on a very short timeframe and applied it to a range of commodity markets all on a much longer timeframe. The objective here was to achieve diversification by trading many different markets and by using much larger timeframes for which volume considerations, that are critical in our S&P work, are much less relevant.

So in the latter part of 2008, I developed this “end of day” type of trading system using my existing time proven supply and demand model and applied it to a range of 37 commodity markets.

By early 2009 the development and refinement was complete and in March the system went live.  I started just paper trading initially as I recommend everyone does when starting something new. This started off so well that my partners in the fund soon urged me to forget the paper trading and take the trades for real and this is exactly what we did from June onwards.

If you would like to hear more about this journey from concept, through development and into actual use in the fund, you can listen to this 19 minute audio interview I gave on 12th November 2009.  Just click on the play button below to listen to the interview:

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Why does it work so well?

Throughout the 28 years that I have been in the markets I have seen just about every approach to harnessing the markets that exists. The vast majority are fundamentally flawed, even many that are in fact profitable for periods of time. The flaw is the reliance upon, and the belief in, the ability to predict the future. My starting point is that the future cannot be known and that any reliance on forecasting is to be avoided at all costs.

Instead I look at the markets from a rather different perspective, one that is both reliable and founded on fact. Instead of worrying about what might, or might not, happen in future – I concentrate on what actually is happening in the present.

Markets move under the action of supply and demand. In fact nothing else causes markets to move. All sorts of factors may go into the decision making of the various buyers and sellers in the market, but the only thing that actually moves a market is the collective actions taken by the buyers and sellers. So if you concentrate your efforts on understanding what market participants are actually doing and find ways to measure supply and demand, you can then build a strategy on a solid foundation. This is exactly what I did many years ago when I first developed my model of market movement, called…

“Financial Physics”

In Financial Physics we categorise market movement into 6 phases. Each phase is characterised by the balance or imbalance of supply and demand currently present in the market. Each phase also has one specific type of trade setup associated with it. Then if the trade setup occurs with an acceptable level of risk for the potential reward available – we take the trade. If however the risk/reward profile does not meet our defined criteria we simply pass on the trade and await the next phase and the next setup.

The reason this system works so well, I believe, is that our model is based upon hard facts and reality plus we are extremely selective when we commit money to the market. Everything has to fall into place, else we stay out of the way. This is why we only average around one trade per quarter in each market, as we are only interested in the highest probability trades and leave the mediocre ones for everyone else to play with.

Not every trade is profitable of course, because supply and demand can change quickly and unexpectedly. This is just something we have to live with and accept as a normal part of the business. Most of the time our trades play out as expected and provide a nice profit. However we also have our share of losing trades. What matters in the long run though is that in every trade we align ourselves with the dominant force currently present in the market and that is why the majority of our trades play out perfectly. The dominant force might be in the same direction as the prevailing trend serving to perpetuate that trend, or it may be in opposition to it ultimately resulting in a trend reversal.

S-I-R Performance

The three charts in the right hand column show the real-time profit and loss of the S-I-R system. This is presented in three different ways as different traders like to view P&L data based upon different criteria:

• The green chart at the top shows the P&L since launch based upon risking 1% of capital on each trade.  This basis is generally applicable to the largest accounts where the most optimum balancing of risk across the different markets is easy to achieve.
• The second chart shown in red shows the P&L based up the dollar profit realised for each $1,000 risked on each trade, assuming a fixed dollar unit size is being traded.  This basis may be more applicable to middle sized accounts where multiple contracts still allows for a degree of risk balancing between the various markets, but without the perfect precision that a large account can utilise.
• The third chart in yellow shows the P&L achieved per contract.  This basis is more indicative of the performance of smaller accounts where a fixed number of contracts (e.g. just one) are traded and consequently there is no balancing of risk between the markets of differing contract sizes and volatility.  However, alternative trading vehicles can provide better risk balance for those with smaller accounts who wish to do so (more on this later).

Just to be clear these are not back tested or hypothetical results, but the results of the trades generated after completion of the development work. As mentioned above the first few trades I simply paper traded, then we started taking them for real on small size and by mid-2009 we were taking trades on full size.

Professor Quinto – my supervisor!

If you listened to the audio interview mentioned above then you also know how these live trades were overseen by Jeff Quinto, America’s preeminent trading coach and 38-year veteran trader. Jeff also witnessed first-hand the whole development of the S-I-R system from the earliest concept through to the very last trade taken, as he oversees all trading activity in our fund. You can read all about Jeff and his ground breaking service by clicking on this picture:

I am going to be absolutely straight with you, as I am with everyone I have any dealings with. The actual performance we have seen to date with the S-I-R system is much better than I had hoped for. Not that I am complaining of course! My honest expectation before starting this was that we would be wonderfully profitable, but not as profitable as we actually have been. I also expected a less smooth equity curve than we have actually had to date.

I expected bigger dips in the curve and I am certain that in future we will have bigger drawdowns than we have seen so far. If you would like to join me in taking these trades in future it is important that you understand this and like me, you must be prepared for flat periods and drawdown periods as well as the nice easy profitable periods like we have seen so far. We may carry on building profits in the easy smooth fashion that we have seen to date. I just don’t know. But don’t worry I will give you guidelines on what we need to be prepared for.

There are several ways to take the S-I-R trades. You can trade them with full-sized futures, mini-futures, options, ETFs and even spread betting. The vehicle used will depend on personal circumstances, available capital, risk tolerance etc.

Balancing risk across markets

I only trade the full-sized futures contracts and all prices quoted in the service are based on these. Futures contracts vary considerably in size from market to market. For example you could trade 10 contracts of Cattle for the same risk as trading a single contract of Copper. The majority of our trades have an initial risk of between $700 and $1,400. Occasionally we get trades with as little as $400 risk and equally rare ones with $3,000 risk.

I always want to risk roughly the same amount on each trade. So to balance the risk between different markets I trade different unit sizes in each market. I would urge you to do the same.

This is why in the P/L chart above each trade has been sized to a notional $1,000 risk per trade. In this way the performance is not distorted by the variation in contract size between the different markets.

My risk per trade is many times bigger than this notional $1,000 and yours may be too. But whatever the unit risk that you choose to use, it is important to set that amount and stick to it. If you vary your risk between trades it is almost certain that you will end up with the smallest positions on the most successful trades and the biggest positions on the losing trades! Don’t ask me why this always happens, but you can absolutely bank on it!

You can view the trade by trade results in an excel spreadsheet by clicking on this picture:

How might you implement these signals?

As I said previously I only operate at the moment using the full-sized futures contracts and all of the orders and prices are based upon these. If your available risk capital is sufficient to trade these same contracts, then you would probably do exactly the same thing as me.

I usually exit these trades in 3 equal sized pieces which means of course trading multiple contracts. If the risk on 3 contracts is too high for your own risk tolerance or account size you should consider either using one of these other smaller vehicles or just using the first 1 or 2 exits.

Please note it is not essential to trade multiple contracts. We have members who trade 1-lots and use the first exit and others that trade 2-lots and use exits 1 and 2. If you use just exit 1 or exit 1 and 2, your total profit may be slightly lower over the long run, but probably not significantly so. The earlier exits also benefit from higher winning percentages and this can be a real bonus when starting out. The following table shows the effect on total profit and winning percentage of exiting fully at each exit, based on the same $1,000 risk per trade:

Smaller accounts or getting started

Mini-Futures: For smaller accounts and/or to increase the number of contracts you are using, you could consider trading the mini-sized futures instead. These are typically 25% – 50% of the size of the full contracts. Not all markets that we trade have a mini-contract available, but the number that do is increasing all of the time. Fortunately the markets that don’t have a mini-contract available tend to be the markets where the full-sized contract is relatively small anyway.

Forex: For currency trades, as well as mini-contracts the Forex markets offer another vehicle for trading in smaller size without loss of liquidity. You must remember though to adjust order prices to allow for the spread between the cash and futures markets.

Options: These provide another low cost way of trading these signals and people with experience of options may prefer this route. By combining your own knowledge of option pricing with my futures prices as entry and exits points, I have no doubt that a very powerful option strategy can be deployed. (I just have never had the time to explore this alternative!)

ETFs: There is an ever growing range of commodity Exchange Traded Funds (ETF’s) that provide another method of deployment for traders with smaller accounts. As these are shares, these can provide an ultra-low cost route to getting started as well as the flexibility to utilise the multiple exits provided by the system.

The use of a “universal” brokerage account in which all of these different vehicles may be traded provides a convenient alternative to funding different accounts for each vehicle. While I am not allowed to recommend brokerage services, I don’t mind sharing with you the fact that I personally use Interactive Brokers for trading these signals and their accounts are of this “universal” variety. I am sure there are others equally worth considering.

Spread Betting: Finally spread betting is a low cost, tax free alternative for deploying these trades if you live in a country where spread betting is available. I know traders that swear by this route for trading the markets, but you have to be careful what bid-ask spreads the brokers offer as these vary considerably between the different markets and the different companies offering them.

I will continue trading the full sized futures contracts myself, so if any of these alternative vehicles are ones that you would like to consider you will need to investigate them yourself.

Scalping: Another idea might be to consider short-term scalping using these signals to provide direction. Only working one side of a market has considerable advantages and means that a trader only has to concentrate on finding low risk short-term scalping opportunities rather than worrying about trading in both directions. This is obviously only for those with considerable experience in short-term trading, but is one of the many ways that these signals could be used.

So there you have many other ways you could use the S-I-R signals rather than simply looking over my shoulder and copying exactly what I am doing, which is of course what most members actually do!

Why am I even offering this service?

Actually there are two reasons why I decided to start this service. Firstly several people asked me to. This is actually how my fund was started some years ago, with several people asking me to handle money for them. Eventually I agreed and it turned out to be a very good step as the business has doubled in size each year since. So as more and more people have asked me to share my S-I-R signals with them I decided to give it a go.

The second reason is a purely selfish reason. Having to get the signals out to a small subscriber base regularly each day forces me to do the work on time each day. I missed a few wonderful trades last year by being late in doing my work. When you work on your own it is very easy to just put it off until the morning. Then when you have done the analysis and enter the orders sometimes the market has already moved and you find you have missed the entry price required. You might be surprised at how often our orders are filled during the supposedly quiet night sessions (another reason why I can only accept a limited number of subscribers). So having to get the orders out to you promptly forces me to do the work on time and thereby ensures I don’t miss my own trades!

How the service operates

We actually operate two services, using exactly the same trading signals – Direct Access and Autopilot.

The Direct Access service is ideal for traders who wish to execute their own trades and who are experienced professional traders.

The Autopilot service is better for those who wish to participate in the S-I-R trades without having to execute the trades themselves. This is ideal for those with busy lives outside of trading or those in time zones that make self-execution less convenient.

Here is a quick comparison of the two services, each of which is described in detail in the following pages:

I hope you are as excited about what you have seen here, as those of us that have been enjoying these profits for all of this time and I look forward to welcoming you to the service.