Let's
begin:
AR:
Hi Charles. For our members who are not familiar with your
program, please summarize your programs history and general
strategy.
CW: Our Global Strategies HL (High Leverage) program began trading
in April 2002. It was followed by a Standard Leverage version (1/2
the volatility of High Leverage) which debuted in June 2002. The
program trades multiple systems in multiple time frames in most of
the liquid futures markets worldwide. Rob and I have worked very
hard in research over the last several years on improving the risk
adjusted returns and have implemented progressive upgrades for Global
Strategies since June 2005.
AR: How and when did you get involved in Futures Trading?
CW: In
late 1982 I attended the first Futures Symposium in Chicago. I
had been attempting to trade commodities for awhile with little
success. It was here that I was first introduced to the two innovations
that would change trading forever. First, satellite delivery of
data, and second PC based charting of intra-day data. I reasoned
that while there was fierce competition for profits with traders
who had been trading daily futures data for decades, no one had
an edge in trading an intra-day 5 minute chart because up until
the early 80’s
they simply did not exist. I thought that I could discover how to
day-trade as well as anyone else. So I bought the computer, got the
data, and began day-trading S&P futures soon after they started
trading at the Merc.
AR: Did you have a mentor or are you self-taught?
CW:
Technically I am self taught. No one in the early 80’s
had any experience day-trading, and the teaching was all about applying
techniques that were applied to daily charts to intra-day charts.
In the final analysis, because of the new technology, no one really
knew any more than anyone else, so through trial and error I designed
my own trading techniques. But psychologically my most influential
mentor was Walt Bressert. I limped into Walt’s seminar, bruised
after a particularly bad stretch of trading. I instinctively knew
that something was missing. In those days, Walt spent a lot of time
talking basic principles, discipline and psychology which helped
to restructure my mind and the way I thought about trading. From
that point onward my trading improved significantly.
Philosophically
my collaborators were Bill and Ralph Cruz, the developers of System
Writer and the founders of TradeStation. Together we developed
System Writer seminars helping their users to learn how to use
the software to develop systems. I helped them launch TradeStation
with seminars around the country called System Trading and Development
using TradeStation. Ultimately all the material we developed for
these seminars became a book called "Trading as a Business".
AR: The Global Strategies program is 100% systematic, have you ever
overridden the system and made discretionary trade decisions and
why?
CW: No
we have never overridden the system and never will. I believe that
the markets will do everything they can to excite your fear and
greed which will lead you to make poor trading decisions. My view
is that the only sane way to not fall into this trap is to trade
mechanically.
I started
my career in manufacturing. Once the engineers had the product
designed and the manufacturing line set up we would never permit
an employee to change the design or color of the product or make
a discretionary decision on how to assemble it differently. Allowing
this would have been a prescription for manufacturing inefficiencies
and inconsistent product design leading to failure. Steve Jobs
would not sell a lot of IPODs if the manufacturing people were
permitted to change the design and features of the product when
they felt like it and the consumer had only a vague idea what features
they would get when they opened the box.
I
apply the same underlying business principle to trading and view
a system as manufacturing of trades. Once the back-testing design
is finished it is not possible to duplicate the hypothetical return
stream unless you put on all of the trades in the exact same manner
in which the system was designed. To then make a discretionary override
produces an inconsistent product that I believe is eventually doomed
to failure.
AR: You run multiple systems on multiple time frames. Do you ever
add or replace systems in anticipation of changing market conditions?
CW:
No, we only add or replace systems if they improve the risk adjusted
returns over the 35 year test period. My experience is that very
few traders are smart enough to anticipate what the markets will
do consistently over time. Having said that, our research shows
that system profits cycle through time frames, that is, at any given
moment the markets are producing profitable moves in one time frame
as opposed to another. The Global Strategies program includes multiple
systems in multiple time frames in an attempt to always be trading
with a system in a time frame that is producing profits. The challenge
is to design the program so that the currently profitable time frames
produce more income than those systems that are operating in time
frames that are not producing.
AR. How does your program handle volatile markets?
CW:
Markets change volatility all the time, which can wreak havoc with
the profitability of the system. Over the last few years we have
progressively implemented some volatility governors for each market
in an effort to stabilize the volatility of each trade. This has
produced a decline in the volatility of the Global Strategies program
over the last two years, without sacrificing upside potential.
AR:
Capital preservation is the key in any program’s success
or failure. How do you control risk?
CW: We control
risk through utilization of stop losses for each position and then
applying the volatility governors for each market. The combination
has a beneficial effect on portfolio exposure. Ultimately it is
this exposure control which drives preservation of capital.
AR: Reviewing your disclosure document, I see your max peak to valley
drawdown was 33.41%. Though not too large, have any changes been
made to the program to further protect capital?
CW: This
drawdown in 2004-2005, while not excessive for the volatility of
the program or when comparing it to our managed futures colleagues,
was about 50% greater than was predicted by our 30 year hypothetical
testing. Rob and I tore apart our testing methodology and implementation
and literally found no flaws. What we concluded is that the futures
markets have indeed changed, for the first time in 30 years. One
of the major assumptions CTAs have made since the early 80’s
is that trading a diversified portfolio of non-correlated markets
and using trailing stops are all that is necessary to control volatility
and contain risk. Even our initial research confirmed this. But in
the early 2000’s this started to change and dissimilar markets
began to correlate. Now for the most part, all markets move at the
same time. We started addressing this issue with a Correlation Overlay
which we put in place in June 2005. We have gradually improved on
this by progressively implementing an increasingly sophisticated
exposure management program. The most recent upgrade occurred in
October 2006.
AR:
Do you have any advice for aspiring CTA’s or private traders?
What would you say is the most important aspect of developing and
maintaining a trading system?
CW: Our
research at Fall River shows that in the final analysis indicators
that produce your entries and exits really don’t
matter. In any given time frame we all get in the markets at about
the same time, and most traders use some form of volatility based
trailing stops which exit at about the same place. What really differentiates
superior traders is how effectively they implement money management
and risk control on the back end and how they manage exposure. My
advice would be don’t get distracted by “indicator fascination” but
rather focus most of your efforts on money management.
AR: What does it take to truly be a great successful system trader?
CW:
The discipline to put on all of the trades no matter what, sound
money management and risk control, and the knowledge to know when
your system has busted.
AR: To conclude, what do you like to do in your spare time to take
your mind off trading?
CW: I
design two-year projects to learn something different. In the past
I have become an instrument rated pilot, been certified for scuba
diving, and earned a second degree black belt in Tae Kwon Do. My
current project is to study the discourses of the world’s
religions to see what they have in common, and try to understand
why and how very different religions evolved out of core teachings
that are very similar.
AR: Thank you.
----------------------
This communication letter is solely for educational and informational
purposes and in not intended as investment advice. All submitted
articles and editorial are the sole views of the author and may
not reflect the views of Absolute Returns. Absolute Returns does
not warrant the accuracy of any content herein.
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