Since the last report on the top 10 trading systems in the February 2006 issue, systematic traders have suffered through one of the most difficult periods in many years. These non-system-friendly markets have been around for nearly three years now and there is no indication they will end soon.
If they shift back to normality soon, however, 2006 will have marked a nadir. All systems, not just a particular style, suffered. The trend followers, hungry for a trend, have been enticed into choppy markets by several false breakouts, or they
didn’t
react quickly enough and paper profits eroded.
On the other end of the spectrum, stock
-
index day traders have underperformed due to the loss of market volatility. Without market movement, day traders cannot make enough to cover transaction costs. The once wildly popular E-mini S&P 500 has continued to drop out of favor with systematic day traders and
has, at least among this trader demographic, been replaced
in portfolios with the E-Mini Russell or E-Mini S&P 400 (
Midcap
).
It’s
no surprise that the top 10 trading system have not been spared. The majority of the
s
ystems in this list
have either
experienced their worst
drawdowns
or have come pretty close in this market.
ISLANDS OF PROFITABILITY
While many systems suffered in 2006, the year was not completely bleak. A handful of markets came to life and helped buoy the performance numbers of systems and commodity trading advisors (
CTA
) alike.
Copper was the big mover early in the year with a surge from $1.98 to $4.04 per lb. Unfortunately, this stratospheric leap was followed by a quick 25%-plus retracement and then a congestive phase. The usual trend following staples, currencies and financials, traded in a very wide trading band, which provided profit and loss potential. The energy sector and sugar, like the metals, exhibited either all-time highs or multi-year highs, followed by major retracements.
The long-only traders and
CTAs
have suffered worse than those who play both sides of the market. The performance of long-only commodity indexes is an example of what can happen when you commit to a long-only bias. Corrections in the energy and metals hurt their performance.