Here is another update from GalleonFX regarding the January drawdown. Results for Jan are:
EUR PAMM -33%
USD PAMM -32%
Ouch! I’m feeling the pain! OK, here is what they have to say about it:
As mentioned in our prior news posting on January 25th 2008, January was extremely bearish and volatile for all world financial indexes and all world currencies. Following on the heals of the falling world financial markets (lead by the Dow Jones and S&P), many of the world currencies (except for Swiss Franc and Japanese Yen – now the safe haven currencies) fell through their own support levels to lows not seen for more than a year.
Many of the currency pairs opposite the Dollar, Yen and Franc had for the past six years enjoyed an upward trend. January represented a strong correction, perhaps even a reversal, of this upward trend. Our strategies had gradually adapted themselves to the aforementioned upward trend, and thus the January correction to this trend – coupled with extreme volatility – played against all our long strategies and made difficult the progress of our short.
It wasn’t till the afternoon of Wednesday January 23, a day after the Fed announced their interest rate cut, that the world financial markets and the world currency pairs staged bear market correction. Our long strategies triggered in a timely manner to be on top of this correction, which helped us out of the worst part of our draw down. But given that it was just a bear market correction in a month that was overall extremely bearish, the correction did not have enough upward power for us to recover completely from earlier losses.
On the plus side of things, January taught us to what degree the currency markets are correlated to the world financial indexes and also to gold, which was moving steadily upwards as the world markets and currencies were falling. Once we understood the “subtle part” of these correlations through extensive back-testing and modeling, we developed three systems to take advantage of these discoveries:
1) US Index Leading Indicator Strategy. This strategy generates buy and sell signals upon breakout or reversal pivot points of the Dow Jones and S&P and then transfers these signals to currencies that become correlated to the indexes at these pivot points. This strategy is applied to intraday bars of AUDUSD, AUDJPY, GBPUSD, GBPCHF, EURCHF and EURUSD. It has been back-tested from 1985 till present, and is very profitable over all 20 years. If it had been in place at the start of January, it would have brought in very nice profits (approximately 25% additional profit to the account) from shorting the above pairs when it detected the pivot reversal fall of the Dow Jones and S&P.
2) Gold Futures Leading Indicator Strategy. This strategy generates buy and sell signals form reading the pivot points of the Gold Futures market and then transfers these signals to currencies that become correlated to Gold at these pivot points. The strategy is applied to intraday bars of AUDUSD, USDCHF and GBPCHF. Gold has been the currency of choice for over a thousand years, and up until 1970 it had provided the standard for US Dollar valuation. Since then gold has been “replaced” by fiat paper currency by most countries, but it still has a subtle influence on some currencies, such as Australia dollar because of Australia’s natural gold resources, and the Swiss Franc because of the Swiss banks longer relationship with gold. When the world currencies fell last month the value of gold shot up to unprecedented new heights, and our new “gold strategies” would have captured much of this movement, bringing us approximately 15% additional profit.
3) Oil Futures Leading Indicator Strategy. This strategy generates buy and sell signals from the reading of the pivot points of the Oil Futures market and then transfers these signals to currencies that become correlated to oil at these points. The strategy is applied to intraday bars of USDCAD and CADJPY. It seems to work best with Canadian dollar pairs (against Dollar and Yen) because Canada is a net exporter of oil, and the US and Japan are net importers of oil.
In addition to the above three leading indicator strategies, we discovered some very powerful countertrend strategies on smaller, 60 minute time frames of the EURCHF, AUDNZD and GBPCHF. These pairs tend to trade within ranges, and our strategies can detect when the range develops and how to play off the support and resistance of these ranges, getting in and out with profit within the same day.
Because of the increased volatility and frequent intraday ranges of January, these pairs would have made some handsome profits in that month (approximately 20% additional profit), as well has 300% or more gains since 1985 in back testing. It should also be noted that because of the increased market volatility and the additional strategies, we have decided to implement a 30% de-leverage per trade from last year. This move will not detract from our potential profits but it will lesson the draw down impact of single trades hitting their stop losses.
In sum, we snatched a golden opportunity from the flames of January’s loss. We discovered and implemented four very powerful strategies that would have given us approximately 50% additional profit for the month had they been in play from the beginning, which would have made January nicely profitable. Going forward in time we are now insured against (and even likely to benefit from) similar bearish and volatile months, just as they are equally profitable in bullish months.
Also, if the world markets do indeed continue their bearish trend, then all our existing veteran strategies will gradually adapt themselves to this trend, generating more shorts than longs to take advantage of bearish conditions. Thus we do not fear the future, because our strategies have been designed with the resilience of 20 years back-testing. Our strategies will survive and profit from most market conditions, though some months might prove challenging.
If you have followed our news over the last few years, you will know we are constantly evolving and improving our strategies and that draw downs are chances for us to learn and improve even more. With out them strategy development and our jobs here would be pretty boring. If you have grown to become confident in our ability to recover from such draw downs as our systems developers here sure are, you make consider times of draw downs to be the best time to open an account or add more funds to your existing account.
Of course past performance is no guarantee of future results but we CAN guarantee we’re doing our best to trade our own funds into profit alongside our clients funds.