System Trading

The August issue of Stock Futures and Options magazine has an article “Systems Traders Charge Through Bear Markets”. Author Michael Covel’s message is that because the Systems Trading approach is based on specific mathematical formulas, with predetermined rules for entering or exiting a trade, it removes the human element of emotion from the investment decision making process. And more importantly, the Sysytems Trading approach offers a viable alternative to “Buy and Hold” investing.
In this SFO article, an excerpt from the 1989 University of Georgia commencement address from Charles S. Sanford Jr. is quoted:
“In the conventional wisdom, risk is asymmetrical: It has only one side, the bad side. … This conventional view of risk is shortsighted and often simply mistaken. … Successful people understand that risk, properly conceived, is often highly productive rather than something to avoid. They appreciate that risk is an advantage to be used rather than a pitfall to be skirted. Such people understand that taking calculated risks is quite different from being rash.
“This view of risk is not only unorthodox, it is paradoxical—the first of several paradoxes that I’m going to present to you today. This one might be encapsulated as follows: Playing it safe is dangerous. Far more often than you would realize, the real risk in life turns out to be the refusal to take a risk.”
Author M. Covel also notes that “…markets do not reward stupidity and/or ignorance in the long run. They reward those with the brains, guts and determination to find opportunity where others have overlooked it.”
This article summarizes many of the key aspects of our philosophy and approach at Four Seasons Capital Growth, which basically uses “Systems Trading” in the management of client’s funds. An extensive amount of effort and time (years) went into developing our proprietary math based formulas, and we believe we have a unique method of market timing. Our proprietary formulas are run toward the end of the trading day, and a specific signal is generated which indicates the likely S&P500 direction for the very next trading day. We use end of day priced Rydex SP500 index mutual funds to trade our signal.
There is nothing subjective about our signal. There is no element of human decision making involved. It is a 100% mechanical approach. We follow our end of day generated signals without deviation.
Our view of risk is in general agreement with the Charles S Sanford excerpt quoted above. In accordance with our signal, we attempt to mitigate risk by using smaller positions (partial allocations) when appropriate. Conversely at other times, we embrace risk and use larger positions (leveraged exposure). We strongly agree with Charles Sanford’s statement that “the real risk in life turns out to be the refusal to take a risk.”
More information about our program can be found on our site at www.4csns.com. Thanks for stopping by.