Managed Futures Database, Resource & Tools

CTA Interview : Charles Wright of Fall River Capital LLC

Today’s CTA interview is with Charles Wright of Fall River Capital LLC. He and partner Robert Friedl manage the Global Strategies programs which have over $60 million in AUM.  The High Leverage program is up close to 30% YTD and has produced an average annual rate of return of over 30% since a major upgrade in June 2005. It has an annual rate of return over 17% since inception 2002.


Stefano Carissimo
Managing Dir.

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.