WHY TRADING SYSTEMS LOVE VOLATILITY

June 7, 2010

With no newsletter last Monday owing to the Memorial Day holiday in the US, it’s been two weeks since our last ne
happened in that time, it feels like it has been two years.

In just 9 trading days since May 24th, Copper is down -9.6%, the Euro down -5.1%, and Russell 2000 futures -4.9
noticeable stocks like BP and XOM) have actually fallen below their 2008/2009 lows, or in the case of flight to safe
treasuries – risen above their 08/09 highs. Consider that the Euro and Wheat are now lower than at any time duri
Corn are within striking distance of those lows, and flight to safety instruments like the 10 yr Note, Euro Bund, and
have broken above their 08/09 crisis period highs.

Whether this means the end of the global recovery or not is for the talking heads on television to debate. But wha
activity has led to a noticeable uptick in volatility, and while that has helped managed futures programs on the wh
below), it has been even more of a shot in the arm for volatility loving trading systems.

But what exactly do we mean when saying volatility has spiked? Many investors are familiar with the CBOE’s volat
the VIX, but don’t really know what that number is supposed to be telling investors.

VIX

The VIX, currently at about 36, is telling us that options traders are assigning a one sigma (one standard deviation
of 36% to the S&P 500 stock index calls and puts they are buying and selling on the Chicago Board Options Excha
volatility level of 36%, in turn, comes out to a move of 2.60% over the next 30 days. If that seems too small, rem
sigma move (defined as 68% of all instances should be below it). Using the defined probability levels represented
(click here to see them defined) and the 2.60% one sigma move represented by the 36% annualized move corres
we can know that traders are assigning the following probabilities via the prices they are paying for options on the

31.73% chance S&P will move more than 2.60% over next 30 days

4.55% chance S&P will move more than 5.19% over next 30 days

0.27% chance S&P will move more than 7.79% over next 30 days
 0.01% chance S&P will move more than 10.38% over next 30 days

0.0001% chance S&P will move more than 12.98% over next 30 days

If you’re wondering how they can only be assigning a 0.27% chance to a move over 7.79% when we just had a m
note that the above are generated assuming normally distributed data, of which financial data certainly is not. Th
selling these options are likely using non-normal distribution calculations in their models (which would put the cha

Average True Range (ATR)

Now that we explained volatility, we’re going to tell you to forget about it – and only consider it as a general gaug
rise or declining. The more important measure for trading systems is the Average True Range.

The Average True Range (ATR) is quite simply, the average of the true range over the last x periods. And the true
range of a market, plus any additional move in the ‘overnight’ session if that caused the market to open higher or
or low.

Unlike the VIX, which is concerned with how much the S&P 500 is going to move over the next 30 days, the ATR is
smoothed over whichever look back period you choose. We prefer to look at both a short term (20 day) and longe
while the VIX is forward looking (it is an index of the probabilities assigned to options which look x months into the
what has actually happened in the market. It is measuring the actual trading range of the market you are looking

Why do we feel the actual trading range is important? Because trading systems are generally either day or swing t
positions from a few hours to a few days. How much the market moves in those few hours to a few days is therefo
trading system can make or lose. The ATR tells us the profit potential and likely risk for trading systems on a day

You can see in the chart above that the S&P has moved from an average daily trading range of roughly 10 to upwa
months. For a trading system, that means their potential profit per day has increased from $2,500 to $7,500 (or a
systems aren’t trying to capture the entire range, and most would be quite happy with capturing 25% to 50% of t
a theoretical trading system with a minimum investment of $20,000 which looks to capture 50% of the day’s rang
$1,000 per trade – we can see that the increase in volatility means an increase in profit potential from $1,250 to $
another angle, that increase in volatility means the profit potential as a percent of the minimum goes from 6.25%

The cool part from a risk standpoint is that the risk represented by the ATR isn’t necessarily equal to the risk for a
because most trading systems employ a hard stop, meaning they risk a set amount (say $1,000) on each trade re
volatile a market is. Because the risk is a set number, the profit potential as a percent of risk goes from 125% of t

And while they are designed to risk only a certain amount, most systems let the market’s price action and volatilit
can make on a trade when the model gets the price and direction correct. This creates a profile where the system
making $3,000 to $5,000 or more (if there is a very large outsized trading range such as last Friday with the Dow

So while the volatility can really help them by allowing them to make much more than they risk when they get a b
necessarily work both ways. That is, they aren’t at risk of losing oversized amounts when there is an increase in v
remains tied to issuing the “wrong” trades many times in a row (or many more times than winning trades over a p
trade turning into a huge loser equal to 20% or more of the account (as we’ve seen with option sellers).

It is this ability of trading systems to make more in high volatility times than they lose in low volatility times which
long volatility plays. By long volatility plays, we mean they are a proxy for being long volatility (they enable you to
volatility). But unlike buying an option or other long volatility plays which will, by definition, lose money if volatility
system won’t necessarily do poorly when volatility declines. It is a poorer environment for them, to be sure, but so
and remain viable.

Recommended Trading Systems

While we’re likely to see a bounce back to the upside sooner or later in stocks, we believe we’re in for more of the
the main ingredient which kept a lid on volatility in 2009 (government stimulus) has less and less of a chance of b
levels of government debt across the world, political environment, and more.

Below are two stock index trading systems exclusive to Attain which we feel can capitalize on the current high vola
course, they have the possibility of substantial losses just like any other futures investment as well. But the times
tied to times when there isn’t enough movement in stock index futures, not the other way around.

> Strategic ES – $15,000 minimum

Strategic ES, along with Strategic SP, is one of the few long volatility type trading models that posted positive [hy
Although the results aren’t as impressive as prior years, the system still outperformed most other short term tradi
Edge AlternativeEdge Short-Term Traders Index which was down -4.01% in 2009. The fact that the system succe
basis when so many others failed leads us to believe that Strategic is not the typical over optimized trading system
succeed in the most difficult market environments.

Strategic is comprised of 8 separate internal models which each attack the market from a different angle. The eigh
models that specialize in trading overnight gaps, continuation patterns, range expansions, seasonality, counter tre
volatility based entries. The combination of these entry strategies along with an aggressive exit strategy has resu
momentum-style trading model that can operate on many different market environments and be applied to a varie
SP, ES, NQ, ERL, EMD, US, and CL.

Sure, it will have volatile periods such as last year’s max DD of close to -40%, but many believe that risk is worth
potential rewards. The system thrives when there are sharp reversals (1-2 day spikes) off medium term (5-10 da
looks to be a classic long volatility trading system which should do well when volatility spikes, and at least in 2009
volatility was on the wane. View the Strategic System Spotlight here.

> Compass SP – $30,000 minimum

The Old Faithful of trading systems, members of the Attain team have been tracking this S&P 500 futures day trad
That’s longer than the track record of many popular managed futures programs combined. Most people are scared
years in 2004 and 2006 and 2009, and the -82% DD which spanned from Nov. 2005 to March 2007. But that DD
the period of extended low volatility, while the 2009 losses mirrored the free fall in volatility levels throughout 200
volatility ended, in Feb 07, the program snapped back to its winning ways impressively.

Compass has a wickedly simplistic logic where it ignores all past price action, and only looks at the current day’s m
whether the day is significantly strong or weak, and then puts in orders to get in line with that daily trend, if it exi
hit the market, Compass likes to see follow through into the close in order to be successful. So a day such as toda
generally moved higher throughout the day and then closed on its highs would likely result in a Compass winner (
market closed at its lows would also be likely winners – Compass doesn’t care whether the market rises or falls) C
sees the Dow up 200, down 300, up 100, and then finishing down 150 would likely result in a losing trade for Com
continue on into the close.

As we’ve said many, many times in the past, Compass has the longest track record of actual fills for any publically
know of, and due in no small part to that lengthy experience; we recommend it as a component of nearly all portf
System Spotlight here.

What if the Trading System Drawdowns look to high for me?

The sometimes large drawdown levels seen in trading systems past performance is often a concern for many inves
allocating some money to futures trading systems. These larger drawdowns are the result of trading systems bein
trading systems do not have a manager overseeing each trade. They don’t have a manager who can decrease the
enter a low volatility period, etc; and that shows up in higher drawdowns over the life of a system as the track rec
ugly of that system across many different environments.

But there are a few things investors can do to lower the effective drawdown of any system (or CTA for that matter
simple way to lower the worst possible drawdown you might experience is to time your entry into a trading system
jumping into Compass for example, and being at risk of seeing another 80% DD, wait for the system to have a 20
waiting for one of those DDs, you can effectively remove that amount from the max DD you will have to incur mov
as the stop trade point, and get in at -40%, the real DD you are risking is just 40% (half of the past worst case sc

Another way to potentially lower the DD is to be your own portfolio manager. If part of the reason trading systems
one is actively managing it, then actively manage it yourself. A savvy investor could potentially lower the max DD
the volatility goes back to the low levels seen in 2005, or instructing Attain to not trade on holiday weeks, or tryin
in 2008 and then wait to reenter the system. The best thing to do in our opinion is usually to stick with a system u
predetermined stop trade point, and not try and start/stop a system; but that’s not to say it couldn’t work to your

The Time is Now for Trading Systems

In conclusion, this remains an uncertain time in the financial markets of the world, and there may be no better wa
volatile times than allocating to one of the above futures trading systems which have a long volatility profile and a
environment.

- Barbara Mueller

IMPORTANT RISK DISCLOSURE

Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated inv
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material poin
investor returns.

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Feature | Week in Review: |

Week in Review: : Global sell off great for most CTAs/Trading Syst
Overview

The headliners late week of Hungary stating they could have debt trouble rekindled sovereign debt issues which w
jobs report sending shockwaves through the marketplace bringing nervousness back to investment sphere. The qu
futures markets as the deteriorating financial health around the globe led to ideas that early demand projections f
altered with the recent sell off in world equity markets. The lone bright spot Natural Gas +13.25% was aided by th
leaking Gulf crude oil well, which has sparked heavy debate in Washington D.C. that a major alternative energy pl
sooner rather than later. One of the major parts of the policy is to use natural gas especially in the auto and truck
measure due to the fact that the resource burns more efficiently and has an abundant supply.

Industrial metals continued to have a poor time dealing with all of the global uncertainty as the sticky sovereign d
poor economic reports in the U.S. quickly discarded any hopes of stability of construction growth. For the week Co
most water followed by Palladium -6.14%, Silver -5.12% and Platinum -2.07%. Gold +2.12% was supported by fl
world economic conditions currently on an uncertain path.

Activity in Stock Index futures again was a victim on worries of sovereign debt problems on news the Hungarian g
about their debt commitments. The monthly U.S. jobs report was also an aid to further pressure as the numbers w
The Russell 2000 futures shed -3.84% followed by Mid-Cap 400 futures -3.10%, S&P 500 futures -2.06%, Dow fut
futures -0.95%.

The balance of the energy complex was again under pressure from further news of heavier supplies even after the
U.S. which is seasonally the start of stronger demand heading into the summer driving season. For the week Crud
Heating Oil -1.81% and RBOB Gasoline -1.56%.

Activity in the currencies featured another round of selling pressure for the Euro-2.45% and Swiss Franc -0.23% a
wane on more debt worries. The Japanese Yen -0.96% was victimized by news of the Prime Minister’s resignation
little to stimulate their weak economy. The Dollar Index +2.00% was a main beneficiary of all the global instabilit
safety.

Commodity and Food products were mostly lower last week as heavier production estimates from government rep
weather not only in the U.S., but abroad added to the selling pressure. Corn -5.29% led the way lower followed by
Cotton -3.74%, Lean Hogs -2.45% and Cocoa -1.55%. Sugar +2.33% was the lone commodity to produce a rally
be lower than earlier forecast sparked support along with ideas that any new alternative energy policy in the U.S.
demand for fuel production.

Managed Futures

That sound heard coming from Chicago last week was the voices of many CTAs yelling “finally!” after a late week s
propelled many multi-market CTAs to great starts in June. Stocks, commodities, and financial futures were all in f
that they too are on the brink of default. The result was a wild end to the week, which saw many managers post t
of the year. (past performance is not indicative of future results)

After one week of trading, the top performing program in June is APA Modified at +6.58%. APA Modified saw gain
stock index futures last week. Accela Capital Management Global Diversified also had a great day of trading on F
month. Others who are in the black include Applied Capital Systems +3.15%, APA Strategic Diversification +2.31
+1.94%, Futures Truth MS4 +1.92%, Covenant Capital Aggressive +1.71%, Dighton Capital USA Aggressive Futu
Integrated Managed Futures Global Concentrated +1.18%, Futures Truth SAM 101 +0.89%, Robinson-Langley Ca
Management +0.75%, 2100 Xenon Managed Futures (2X) +0.73%, Dominion Capital Management Sapphire +0.4
Magnum +0.11%.

Alas, despite the favorable trading conditions, not all multi-market managers posted positive numbers last week.
GT Capital Management -0.17%, Mesirow Financial Commodities Low Volatility -0.18%, Mesirow Financial Commo
Quantum Leap Capital Management -0.23%, Sequential Capital Management -0.33%, and Auctos Capital Managem
0.90%.

Option selling programs were also not very receptive to the spike in volatility, although there were not any major
the black included Crescent Bay BVP +2.62%, ACE DCP +0.62%, and HB Capital Management +0.08%. Kingsview
at breakeven. Programs in the red include FCI OSS -0.24%, Cervino Diversified -0.25%, Cervino Diversifed 2X -0
0.76%, ACE SIPC -0.89%, and FCI CPP -1.03%, and Clarity Capital Management -1.41%.

Most specialty managers also did not participate in the move, as the volatility remained tied to stocks and financia
2100 Xenon Fixed Income posted small gains at +0.17%, but they were the only ones in the black. Spread trader
slightly at -0.20%, Oak Investment Group -0.31%, NDX Abedengo -0.33%, NDX Shadrach -0.51%, P/E Standard

Finally, stock index traders were mixed with Paskewitz Asset Management 3X Contrarian at +1.13% and Roe Capi
Index -1.58%.

Trading Systems

The equity markets last week rallied during the early portion of the week before they reversed and continue to slid
Sovereign debt crisis worsening. The increased uncertainty in the markets caused the bonds to make a big jump u
the week the bonds trended downward. The Soybean market continued to range between the 935 and 950 price l
markets proved to be a good thing for most of the trading systems.

The majority of the day and trading systems were in the green last week with Strategic SP ahead of the pack with
SP was able to make some nice long trades during the early part of the week and then reverse direction along with
near the highs. ViperIIA EMD came in second with a result of +$2,067.95. Early on in the week Viper got long ear
moves up which helped produced some nice profits. The other positive results included Waugh ERL at +$2,060.00
Compass SP at $1,379.63, EVP 1 US at $1, 226.69, Balance Point ES at $1, 022. 50, AG Mechwarrior ES at $765.0
$732.50, Polaris ES at $395.00, Jaws US 60 US at $313.75, Compass ES at $227.50, Bounce EMD at $160.00, Bo
PSI! ERL at $110.00.

There were a few negative results last week. Clipper ERL last week got caught long near the highs early on and th
near the end of the week. Unfortunately, the short trade wasn’t enough and Clipper ERL finished at -$523.65. Som
MoneyBeans S at -$300.00, Waugh Swing ES at -$455.00, SITA ES at -$735.00, and Waugh CTO ERL at -$1,290.

IMPORTANT RISK DISCLOSURE

Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated inv
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material poin
investor returns.

Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Adviso
programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain")
based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should n
individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or n
proprietary results, and other important footnotes on the advisor's track record.

The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved
accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses
actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: startin
behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and mon
Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/l
website.

Please read carefully the CFTC required disclaimer regarding hypothetical results below.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED B
IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOW
FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULT
BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS I
PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIA
HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL T
ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSS
WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELA
GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNT
OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.

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