The account will be traded
using GCM Supercharged Index Trading system. While its details are the
property of Globe Capital Management, Corp. and its intended to be used
only by its traders, a brief description is provided below:
The
relatively recent introduction of ETFs has made possible market index
trading for small investors. An ETF is a Fund that trades like a regular
stock. There are as many ETFs as there are indexes. GCM concentrates
only in the ones that tracks the major U.S. stock market indexes: The
Diamonds Trust (DIA), which tracks the Dow Jones Industrial Average; The
S&P 500 Depositary Receipts or Spider (SPY), which tracks the
Standard & Poor 500; The Nasdaq-100 Trust (QQQ), which tracks the
Nasdaq 100 (not to be confused with the Nasdaq Composite); The S&P
Mid Cap 400 Depositary Receipts (MDY), which tracks the Standard &
Poor 400; and the iShares Russell 2000 (IWM), which tracks the Russell
2000 index of small cap companies.
Although
these securities are funds, they are traded on the stock exchanges in
“real time”, meaning that their prices are updated continually and
can be bought and sold at any time during the exchange’s trading day.
By contrast, mutual funds that tracks similar market indexes have to be
bought and sold at the end of the day and at that day’s closing price.
Also, unlike conventional funds, ETFs can be bought on margin and can be
sold short.
Today,
billions of dollars are traded daily through ETFs.
Market Confirmation vs.
Price Prediction
Unlike the competition, we do
not attempt to predict market direction. Instead, our system’s
indicators merely detect the changes in market trends and trades in its
direction. Our system works in both, up and down trends.
By waiting for the markets to
confirm its direction, our system is always “late” in its entries
and exits. In other words, we don’t attempt to catch the exact bottoms
and neither to jump at the top, something that we consider impossible to
do consistently. However, the advantage of our approach is that we enter
the markets when the downside risk is at its lowest and we exit them
when the risk of cutting our profits short is at the lowest level.
Being Rich vs. Being Right
Most
trading systems make emphasis in being right. “You can’t go broke
taking profits” is a common trader’s say. However, many traders go
broke doing exactly that! If you are right 9 times out of 10, with
average winnings of $1 per attempt, and you are wrong only 1 time out of
10, with a loss of $10, you will have a net loss of $1 over the long
haul. By contrast, if you are right only 3 times out of 10 but your
average win is $3 and your average loss is $1, despite the fact that you
lose 7 times out of 10, in the long run, you end ahead by $2. The
combination of probability of win/lose and average gain/loss is called expectancy.
This is the concept behind the old Wall Street cliché of “cutting
your losses short and letting your profits run”.
One of
our edges over the competition is that we, at GCM, make it OK to lose
from time to time. No body wants to lose money, of course, and we are
not the exception. However, we recognize that trading is a business in
which losses are unavoidable. Therefore, our efforts are directed toward
the achievement of the highest positive expectancy possible.
Although our strategy has a reliability of more than 70% (meaning that
only 30% of our trades are losers), our objective is to lose the least
possible when we are wrong while maximizing our gains when we are right.
Our strategy is designed to get an expectancy of $0.50 or more. This
means that, over the long run, EVERY trade will yield 50 cents per each
dollar risked (not to be confused with “per dollar allocated”). For
GCM, 1 dollar invested is NOT 1 dollar risked. Our system is designed to
limit our risk to only a tiny fraction of the total amount allocated.
Whenever we enter a position we expect it to move in our favor, like
everybody else does. However, unlike most people, when the market
moves against us, we humbly accept the fact that such things can happen,
and as soon as our pre-set down limit is reached, we abort the position
immediately. Sell first; ask questions later; is our motto. The
safety of our client’s capital comes first! Our strategy usually
limits our risk to only 1 to 6 cents per each dollar allocated.
Position Sizing, The Cornerstone of CGM Trading
Dr. Van K Tharp calls
position sizing, the most important aspect of any trading system. He
defines it as “the part of your system that tells you how much to risk
on any given trade”. This is an area in which GCM has a tremendous
advantage over its competition. Position sizing is an integral part of
GCM trading system. While our technical indicators tell us when to buy
and when to sell, our position sizing algorithms tell us how much
capital will be allocated among the basket of securities that GCM
trades.
GCM uses
one of the most sophisticated models for capital allocation available
today: The Percent Volatility. Our trading strategy utilizes the concept
of Average True Range (ATR) to assess the probable amount of risk per
share that we are likely to encounter during the course of a given
trade. This risk is constant among all of GCM managed accounts. Our
position sizing algorithms relates the risk per share with the
account’s equity to determine how much to invest in a single position.
For
example: On a $10,000 account with a limit on exposure to volatility of
only 1% of the account equity per position, let's say that the strategy
gives an entry signal for QQQ at a price of $40.00 per share, and the
ATR for the last 10 days is 1.50. The total risk allowance is
10,000.00*0.01 = 100. The volatility per share is 1.50. Thus, the
maximum number of shares that can be purchased is 100/1.50 = 66 (the
number is always rounded down). At $40.00 per share, the total
allocation is 66*40.00 = $2,640.00 While this number may seem too low in
this example, it is not uncommon that, during strong up trends, our
positions needs to be trimmed down because we get entry signals on
several securities at the same time and we end hitting the 2X leverage
limit on stock trading!
Position Sizing and Our
Client’s Goals
Since
the risk per share is a function of the volatility of the securities
that GCM trades, this parameter is constant among all accounts that GCM
manages using this strategy.
The
variability of reward-to-risk ratios is a function of the position
sizing parameters; which varies from the conservative 1% of account
equity with a maximum portfolio risk of 5% (which means up to 5
concurrent open positions, each with an initial risk of 1%); to the
aggressive 1.75% of out-of pocket equity plus 6% of market gains for a
maximum portfolio risk of 25%!
Our preliminary study shows a
reliability above 70% and a final expectancy of over 60 cents per dollar
risked. These figures will constitute our target goals. Because of the
small initial equity, we estimate that the system will achieve its target
expectancy by the end of the 2nd year.
Given the high level of
reliability that the strategy showed during the preliminary study, we will
use an aggressive approach to size our positions.
