In the October issue of RINA Systems' Performance Update:

         Feature Highlight – A look at Exposure Graphs
         New Information – Performance Update Strategies
         Offers – Custom Development Solutions

Feature Highlight - Both Portfolio Evaluator 6 and PortfolioStream have extensive exposure graphs to help users make practical decisions about implementing trading strategies. One of the most common questions we receive is how much capital should one allocate to their systems given the multitude of competing orders and positions that can occur in a portfolio. There are several factors that will contribute to the decision including: the traders desired performance characteristics and the risk they are willing to take, the size of historical drawdowns that might cause the termination of a strategy, whether one will assume the profits are reinvested in the strategy, and of course the competing or simultaneous positions/signals within the portfolio and their capital requirements. To assist in assessing the question of overlapping or simultaneous positions/signals we have created a section of graphs called Exposure Graphs. These include:

Ø         Margin
Ø         Margin to Equity Ratio
Ø         Open Position Long
Ø         Open Position Short
Ø         Open Position Net
Ø         Risk Value
Ø         Unused Capital

The margin graphs can be used to see how much margin a portfolio is committing over time to the market. Open Position Long, Short and Net can be used to determine the bias of a trading strategy, especially relevant for system developers seeking to create “market neutral” strategies. With Risk Value you can export from TradeStation your own definition of initial risk and then view for any day in the history the risk of open positions (also typically defined as the distance to your stops or the amount the portfolio would decline if the stops were hit) on a portfolio basis. Finally, many users have asked us to display how much of the capital is not used by open positions. The Unused Capital graph will show the value of equity, which is not currently committed to open positions. These graphs are designed to better help you understand your portfolios’ use of capital over time.

New Information - Performance Update Strategies

We are beginning a new series of trading strategy analysis in Performance Update. Our clients asked us to demonstrate the performance of some basic strategies applied to a wide basket of markets over the next several months. We plan to run the strategies for an entire historical period as well as the performance since the last observation each time we publish the results. To accomplish this will take several basic system concepts and simulate their performance in a portfolio. This will form the research content of the Performance Update newsletter.

Initially we will use two long-term trend following strategies with a couple of parameters for each. The results will then be displayed in a table for each portfolio. Over time we plan to add additional strategies, which we will track and update. To update our strategies and test them we will use the automation capabilities of PortfolioStream and TradeStation 7.1.

Strategy Testing - Trend Following Strategies

For long-term trend strategies we will use a few commonly used entry techniques. We seek rather generic entry logic so that we may better test and stay updated on the broader performance of trend strategies, as opposed to highly refined specific entry and exit logic. The two strategies we selected were taken from the book “Trading Systems and Methods” by Perry J. Kaufman, which we thought would be as good a source as any for commonly disseminated trend following methodologies (the book is in it’s third edition).

We have selected parameters in advance, as we wish to avoid excessive retrospective selection of optimal values. Also, from a qualitative perspective we thought it would be useful to test a short to intermediate, and intermediate, and finally longer-term parameter for each strategy. This is accomplished by adjusting the look back parameter x (and y for the channel breakout strategy) which determines over how many days the channel is determined. We also thought a test period of 1995 through current would give us an adequate historical perspective. As mentioned, in the future we will keep track of how these strategies have performed subsequent to our publishing of the historical performance.

The strategies are tested on a portfolio of 29 domestic futures markets. Because our objective is to track the broad performance of trend (and later on other) strategies, we do not make use of market selection based on historical performance. Finally, to equalize trade size across markets (so that markets are weighted relatively equally in terms of their impact on portfolio performance given the varying volatilities of the instruments traded) we create PositionSize units based on the 30-day average true range of dollar volatility of the underlying security (a common approach to equalize volatility used by traders). We then allocate 1 percent of $1,000,000 hypothetical funding towards each trade.

Channel Breakout

The following strategy is described on Kaufman, page 101, which enters in the direction of the trend, based on new highs (for longs) and lows (for shorts). In our experience we believe this is one of the most commonly used forms of a trend following strategy. The exit logic is simply a reversal against the open positions in the form of a new low for longs and new highs for shorts (but derived from a shorter look back than the entry).

The following is specific code we used to implement this in TradeStation 7:

{
Simple CBO Strategy which uses two intervals of measurement of highs and lows
With look back parameter x for entries and y for exits.
}

Inputs: x(20), y(10), Percent(.01);
Vars: PositionSize(2);

PositionSize = (Percent * 1000000 ) / ( AvgTrueRange(30)* BigPointValue );

If Close > Highest (High, x) [1] and Close>Close [1] then
            Buy PositionSize Contracts Next Bar Open;
If Close < Lowest (Low, x) [1] and Close<Close [1] then
            Sell Short PositionSize Contracts Next Bar Open;


If MarketPosition = 1 and Close < Lowest (Low, y) [1] then
            Sell Next Bar Open;
If MarketPosition = -1 and Close > Highest (High,y) [1] then
            Buy to Cover Next Bar Open;

Bollinger Band Channels

For another type of trend following strategy we selected a variation of the channel breakout strategy that is described in Kaufman, page 92. The trading rules are described as following:

“Buy (close out shorts and go long) when price penetrates (closes above) the upper band.” The upper band being defined as 2 standard deviations calculated using a 20 period look back + the average price over the same look back. "Sell (close out longs and go short) when the price penetrates (closes below) the lower band.” The lower band being defined as 2 standard deviations calculated using a 20 period look back, subtracted from the average price over the same look back.

An exit logic has been suggested as follows “Close out longs when prices reverse and go below the moving average value (the center of the band).” and “Cover your shorts when prices penetrate upward through the moving average value.”

The following is specific code we used to implement this in TradeStation 7:

{
A CBO using Bollinger Bands, Adapted from Kaufman pg. 92
}

Inputs: x(20), y(2), Percent(.01);
Vars: Upperband(0), LowerBand(0),MiddleBand(0), PositionSize(0);


Upperband = Average (Close, x) + y * StdDev (Close,x);

LowerBand = Average (Close, x) - y * StdDev (Close,x);
MiddleBand = Average (Close, x);

PositionSize = (Percent * 1000000 ) / ( AvgTrueRange(30)* BigPointValue );

If marketposition <> 1 and Close > Upperband then
            Buy PositionSize Contracts Next Bar Open ;
If marketposition <> -1 and Close < LowerBand then
            Sell Short PositionSize Contracts Next Bar Open ;

If marketposition = 1 and Close < MiddleBand then
            Sell Next Bar Open;
If marketposition = -1 and Close > MiddleBand then
            Buy to Cover Next Bar Open;

The Results - Channel Breakout

The Results - Bollinger Band Channels

Interestingly in the results we see that the longer-term strategies PerUp_BBandCBO(60,2,0.01) and PerUp_CBO(80,32,0.01) achieved the best simulated Net Profit without adding additional drawdown. Though it is worth noting that these portfolios all produced very large drawdowns with respect to funding assumptions and total profits. However, it is good to keep in mind that these are purposefully simple logics for entry and exits to test broadly the performance of trend following and are not presumed to be tradable strategies.

The average trade value is on a per trade basis. Nearly all of the trades simulated here were multiple contract trades due to the fact they were geared to risk 1% based on a hypothetical constant funding of 1 million dollars. The per-contract average trade would have obviously been much smaller.Finally, the maximum drawdown is the largest peak to trough dollar drawdown for the portfolio during the tested period.

Now that we have established a baseline performance in future issues we will update these strategies to see how they are doing, and possibly add more strategies to the list of those we track.

Offers - Custom Development Solutions

Our growth over the last year has increased our capacity to take on custom research and software projects for our customers in addition to our award winning commercial software applications. Many users tell us they were not aware we could leverage our existing applications to deliver a custom solution for them. To read more information about RINA Systems' Custom Development services click HERE. If you think that you might benefit by having us customize one of our commercial applications, or need applications developed from the ground up, we would be interested to discuss this with you in greater detail. To read more information from RINA Systems' Testimonials page click HERE. If you would like to contact RINA Systems, Inc. you may do so via phone at (513)-469-7462, via fax at (513)-469-2223, or via e-mail at info@rinasystems.com

The purpose of the Performance Update newsletter is to offer ideas and educational samples of strategies through the use of RINA Systems software applications. The strategies described in the Performance Update newsletter are not intended to be used as actual trading strategies, but are included for educational purposes only. No offer or solicitation to buy or sell securities, commodities or securities derivative products of any kind, or any type of trading or investment advice, recommendation or strategy, is made, given or in any manner provided by RINA Systems or any of its affiliates. If such advice is sought, the services of a licensed professional should be obtained. Past performance, whether actual or indicated by historical, simulated tests of strategies, is no guarantee of future performance or success. Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record simulations do not represent actual trading. Also since the trades have not actually been executed the results may have under - or over - compensated for the impact if any, of certain market factors such as liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is a significant risk of loss involved in futures and securities trading. RINA Systems, Inc. will not be responsible for any losses or lost profits resulting from investment decisions based on any RINA Systems product or service information obtained through use of any RINA Systems product or service or otherwise. TradeStation® and EasyLanguage® are registered trademarks of TradeStation Technologies, Inc.