Chuck LeBeau's System Traders Club
BULLETIN Vol. 1 Number 15 Dec. 3, 1998
Elaborating On Our Multiple Systems Concept
Only a handful of members have been with us since the very beginning of the Club last February so I thought it would be worthwhile to repeat and clarify some of our logic in suggesting that multiple systems might be a worthwhile approach to trading.
In the past the typical approach was to simply take one systematic approach and apply it to one or more markets. Because of the potential for major profits per trade the majority of knowledgeable traders were naturally attracted to trend following strategies. Richard Donchian and many of the pioneers of technical analysis were advocates of trend following and they as well as many professional trading advisors were able to generate profitable historical results to substantiate their preference for this style of trading. The giant inflationary trends of the 70s made these early trend followers rich and the world of technical analysis was thoroughly convinced that trend following was obviously and conclusively the most profitable way to trade.
In more recent times the so-called Turtle System is a good example of this basic approach. A simple but effective trend following system applied to many different markets with highly disciplined money management (the true secret of their success) does indeed provide a profitable equity curve over time as the Turtles and many other professional traders have clearly demonstrated.
In the last few years the absence of inflation and the coordination of worldwide economic policies has, in our opinion, resulted in fewer trends than in the past. As trend following profits have become less frequent the trend followers have sought diversification by adding more global markets to their ever-expanding portfolios.
However it takes a great deal of capital to diversify over so many different markets and long term trend following in general is typified by frequent and very substantial drawdowns, with the Turtles and other professionals being no exception. The frequent losses in the non-trending markets can only be offset by catching some occasional winning trades of huge proportions. Unfortunately only extremely broad diversification can offer a trend follower any assurance of participating in those rare markets where the big winners are found. As a result of this increased need for market diversification the most successful of modern traders have large staffs of employees working around the clock frantically trading markets all over the world.
All of this effort at diversification is predicated on the assumption that we must take one system and then find as many markets as we can to trade with it. The search for this one system that successfully trades all markets has often been alluded to as the elusive “Search for the Holy Grail.” Having tried the “one system trades all” approach for several years with limited diversification and limited success we began searching for a better way to trade and we think we have found it. We intend to trade multiple systems in multiple markets.
We have long been advocates of looking at markets as having three directions rather than just two. We view markets as being up, down or sideways. To carry that logic one step further we have also observed that the characteristics of the markets in each direction are distinctly different. Markets going up tend to follow a generally orderly pattern that is much different from a market that is going down and the sideways patterns are not anything at all like the up and down trends. With this perception in mind, why should we try to trade up, down and sideways markets with the same system? To be sure, it can and has been done. We did it ourselves with a simple ADX system but only with very limited efficiency.
Wouldn’t it make more sense to design several systems that were each very specific in their application? For example we can easily design systems that work well in a rising market and these simple systems can perform that limited task in a surprisingly efficient manner. We can also design these long-only systems to include a simple on/off switch so that when the market is not rising they automatically shut down and no longer generate trading signals. We wouldn’t want to be trading an up-only system in a down market would we? A little bit of common sense goes a long way in this business of trading.
In a down market we would want to be trading a system that goes short and was capable of taking advantage of our perception of what a down market usually looks like. In our experience down markets tend to be quicker and more violent so profits need to be taken faster than those we might take in a rising market. The old adage of letting profits run is a policy best employed in rising markets. After all, no commodity markets ever go to zero. (However, the bearishness in commodities we have experienced for the last year or two might have some of us wondering if zero is really out of the question in some markets.) There is certainly no question in my mind that the upside in any tangible commodity is much less bounded than the downside, so it makes perfect sense to let our long side profits run while taking our short side profits much sooner.
Sideways markets on the other hand require an entirely different strategy for both entries and exits. When a market is in a trading range there is seldom anything to be gained by letting profits run in either direction because they will only turn into losses. Since our profits are limited by the boundaries of the trading range, the entries need to be as precise as possible and we need a high percentage of winning trades to make up for occasional losses that are large relative to our limited gains.
We have little doubt that there is great logic and justification for having different systems for up, down and sideways market conditions. Over time we intend to create and employ multiple trading strategies in multiple markets. We seek to become diversified in our systems as well as diversified in our markets.
We are now very close close to achieving our goal of creating a complete multiple system package for the bond market. As an example of our grand scheme lets briefly look at where each of our bond systems fits into our strategy as we trade from the beginning to the end of a complete price cycle.
Starting at the bottom of the cycle, the Phoenix system is designed to begin trading the long side while the trend, by most definitions, is still down. If this bottom-picking system is correct and the market reverses direction and begins trending upward as anticipated, then the “25 X 25” system and the Big and Little Dipper systems will recognize the confirmed uptrend and start buying dips of varying magnitude within the strengthening uptrend. It is very likely that the Phoenix system will still be patiently long with a nice profit while these other system are beginning to identify and buy various dips in the trend.
At this point we would hope to have more than one long position. In our experience, a well established uptrend is one of the lowest risk and potentially profitable market types to be trading. These very orderly markets present an ideal situation for carrying multiple positions. Throughout the uptrend the Little Dipper is trading the short term price swings, the “25 X 25” system and the Big Dipper are trading the intermediate swings and the Phoenix system is patiently riding the longer term trend. Not only are we trading multiple strategies but we are also trading the uptrend over multiple time frames.
As our price cycle moves on and the market changes its trend and goes into a broad consolidation or perhaps shows evidence of a downtrend, the long only systems shut down and the Serendipity and Sidewinder systems, which trade both long and short, will automatically begin selling rallies and buying dips. These two systems take over as our dominant strategies because they were specifically designed to profit from sideways or downtrending markets. If the bond market resumes the previous up trend the long only systems will automatically reactivate. If the market continues downward the Serendipity and Sidewinder systems will continuously be selling short on rallies as the market declines. Finally after a sharp and sustained down move completes the cycle the Phoenix system will try to pick another bottom and the cycle starts anew.
As you can see, it was not our intent to simply design six or seven systems that could make money in bonds. The intent of our multiple system approach is to be constantly trading with only those systems that are most appropriate for the current market conditions in bonds. Each system has its assigned mission and each plays an important role in the grand scheme.
How well will this multiple strategy work? We can’t say with any certainty, but the idea makes sense to us and the historical results are very promising. But the proof as always lies somewhere in the future. The combined historical results of our bond systems can now be viewed on our web site at:
In our next Bulletin we will discuss and give some practical advice on how to manage positions when trading multiple systems.
Recent additions to the Traders Club Website.
Chuck mentioned the Combined Equity Page http://traderclub.com/systems_bondscombined.htm This is the most recent change on the site. In addition we have also added Trade by Trade Reports for all of our systems. You will find a link at the top and bottom of each System's page which will take you to the report for that system.
THE NEW FORUM on the Traders Club Website is also up and running. http://traderclub.com/discus/board.html
Some of you have been there already and made use of it. We hope that the rest of you take advantage of this excellent way to exchange ideas and share with fellow members. The New Forum has features that make it easier to post messages, create new threads and keep track of everything that is going on. Here is a brief rundown on some of the features.
NAVIGATION:This Forum uses Frames and has a frame on the left side of your browser window and a Main window on the Right side. Whatever you click on the Left shows up in the right. This allows you to be able to do any moving around the forum from wherever you are. When you first enter the Forum there are three "Topics" at the top and some instructions below, we suggest you read the instructions before moving into the "Main" forum area. If you would like to practice posting we have a test area where you can experiment, and be sure to leave us messages in the suggestion area.
POSTING: Once you enter the Main Area the threads on the forum are there. Below is a button for starting a new thread and a message area at the bottom of the page for making new posts. I keep getting questions about the username and password. This software is configured for private discussion areas and other features dependent on User/Pass . We are not using these "secure" features at this time, however it is still necessary to enter a username when you make a post. It can be any username, however we suggest that you use the same name when you post so that your messages can be identified by others. If you enter your email address your name will be hyperlinked to your email address in the final post.
SEARCHING: There are several methods for searching the forum. They can be accessed from the top of the navigation frame on the left. Topics brings you to the Main Forum Page. New Messages takes you to a search page where you can look back as many days as you want to see all the messages that are new. Keyword search allows you to search for specific text in the forum and can also be used to find posts by a specific person. Try searching For Chuck. Tree view shows you all the topics and threads and is a good way to see everything that is going on in the forum at one time. Also when you search the forum the username feature is not functional and is not required. If you want to know what was posted since the last time you were on the forum better method is to simply set the number of days back you want to search.
FORMATTING: The new forum allows you to do many things with your posts the most exciting being the ability to add images, and excel spreadsheets. You simply copy them from your application into the forum message. There are many other features, we suggest you read the Formatting Section of the Forum Help.
REGARDING THE OLD FORUM: As soon as the New Forum went online, the old forum became unavailable. We began to move the posts over and to date have 80% of them moved. The rest will be there soon. These posts are timestamped with the current date, however we are leaving the original date in the post and keeping threads intact to provide some continuity.
Some people have asked us to go back to the Old Forum and we can only say, please be patient and take some time to use this new area. We think it is a great improvement and is a better tool for communicating amoung members.
WHAT'S COMING: There are plans for a System Owners area which will be secure and only available to people who have bought one or more of our systems. Here you will be able to discuss the systems in detail, with other owners, compare test results, watch signals and monitor trades and generally communicate in a private enviornment.
Please continue to send me emails when you have a problem with the Website or to make a suggestion. Many of the changes and improvements to the site come from members telling us what they want. We are only an email away.
That’s all for now.
Good luck and good trading