New Trade Parameters

Price action has been increasingly noisy and volatile recently. This is due to an increase in market participants, higher market valuations, and the probability of a top being put in. The volatile technology and Internet sectors as represented by the Nasdaq Index have especially increased the market volatility as a whole.

Our volatility noise measure has increased markedly in recent months and continues to rise. For example: today's (July 23, 1999) median 1-minute bar was 1.10 points (2/3's of our stop). See Chart A for the last five day's 1-minute bar ranges. The red dotted line represents our current stop size.

Our system has performed admirably up to the last several months but profitability has declined recently and is correlated to this increase in volatility and noise. Our entry system is very robust and has a high percentage of entries in the correct direction. Too often we have placed trades only to see our stop hit on a retracement, with price then continuing the move in our original direction. Quite a few of these trades have seen substantial moves that we unfortunately missed due to our current stop placement.

An excellent example of our system's current difficulties is shown in the 5M bar chart of our entries on July 23rd (see Chart B). The entries are well placed and well timed but due to the current cancel/replace series, we netted but 320 points when we should have netted 1500-2000 points.

Due to these changing market conditions, and the resultant degradation of results in our system, we find it necessary to change our system parameters. The parameters that we are changing are the initial stop size and the cancel/replace regimen of our protective stops. Additionally, we will return to trading 3 contracts in a set rather than our current 2 contracts. We reduced the contract set from 3 to 2 when volatility increased in December 1998.

With larger stops and trading three contracts comes an increase in possible drawdowns. Consequently, our model minimum account size must increase to reduce the risk of ruin. Our new parameters are:

3 contracts traded
maximum stop size 3.10 points
minimum account size - $75,000

By back testing the new stop parameters and the new cancel/replace regimen our current results would hypothetically be:

320% return vs 50% return to date
an 88% reduction in drawdowns
52% fewer losses

Though our results six months into the year show a 50% return, which is quite good by anyone's standards, some system parameters had degraded considerably in the past several months, creating untenable losses had they continued. We think you will find these changes will improve your bottom line.