Checkmate Trading System

Description

Expert Research

Award winning software developer and successful hedge fund manager Dean Hoffman has nearly 20 years of systems trading experience

 

Futures Truth Magazine© Interview of Dean Hoffman

(Futures Truth is an Independent rating agency that monitors systems submitted by developers) June/July 2002 Issue

 

Your system has done well. To what do you attribute its performance?

 

The word that comes to mind is robustness. All of our systems have been stress-tested to make sure that they produce good results over a very large number of commodities over a very long period of time. Furthermore, all of our systems trade every market with identical rules and parameters to avoid any type of optimizing or curve fitting.

 

In the development phase, we also spend an enormous amount of time evaluating risk-to-reward ratios. Obviously, two systems can both make roughly the same amount of net profit yet have dramatically different risk-to-reward ratios. Things such as the average and maximum drawdown as well as drawdown durations have a significant impact on a system’s tradability. With our systems, risk-to-reward ratios are given far more weight than net profits alone. For example, our system Checkmate tends to have net profits less than many other trend following systems. However, its drawdowns tend to be far smaller and its risk-to-reward ratios much higher than most other systems. When you combine a robust system with one that has high risk-to-reward ratios, I think you’ve got a good combination.

 

Do you have any advice for those who trade any of your systems?

 

I would advise people not to focus too much on day-to-day results. If you know the historical drawdown levels and are comfortable with them, then just let the systems perform. Day-to-day monitoring is too much work both emotionally and literally. This is also the reason I am a strong fan of using a “systems” broker to trade your account.

 

Is there anything that you would tell to those new to trading commodities or stocks that you wish someone had told you when you were getting started?

 

I think the most important thing I wish somebody had shared with me early on was the importance of position sizing and money management. I remember my first few years as a system developer were spent focusing almost exclusively on single contract based systems. Quite frankly, most of the testing products available really only allow for this type of testing. When I eventually did start testing on money management based platforms, I got a very rude surprise! I found out that the best single contract based systems almost invariably were not the best money management systems. This flew in the face of much conventional wisdom that says, “Find the best single contract based system first and then apply money management to it.” I learned the hard way that this does not work. I had to pretty much start from scratch rebuilding money management based systems.

 

One of the reasons I prefer money management based systems is because I think they are much more robust than single contract based systems. In my opinion, it does not make sense to trade one contract of natural gas with an average daily volatility of around $2000 for every one contract of Eurodollars with an average daily volatility of $150. Even though you can make a system like that look good with smooth equity curves, you have still weighted the system for the heavier market. In the previous example you could just simply remove the Eurodollar trades and get roughly the same performance. In essence, the system has been inadvertently curve fit to natural gas even though both markets are traded the same way. I would rather trade a system developed in an environment where each market has been given equal weighting and importance. This way, I am no longer dependent on a smaller percentage of the markets within the portfolio to perform. It’s far better to have 30 out of 30 markets be meaningful instead of 20 out of 30 markets, etc. If given the choice between two systems that both made a million dollars (and all other things being equal), I would rather trade the system that made most of its profits equally from all of the markets in the portfolio as opposed to the system that made most of its profits unequally from just a few of the markets in the portfolio. Once again, this relates back to robustness.

 

What do you think the hot markets and stocks are this year?

 

I have no idea what markets will continue to be hot this year; in fact, I really don’t like to make predictions. I find that the vast majority of problems with traders come from their focus on trying to predict. Most good trading systems have very low success rates, usually only about 30-40% winning trades. This indicates that trading success is not so much about good predictions but rather about good rules about what to do both when you’re right and when you’re wrong.

 

It seems as though your preference for trading is longer term. Any particular reason why?

 

After nearly 10 years of developing trading systems I have just not found any short-term systems that I am particularly comfortable with. For example, I think that most S&P day-trading systems dramatically underestimate the impact of slippage. It’s not that I don’t like short-term systems, it’s just that from a pure risk-to-reward standpoint I have found longer term systems combined with proper money management have the best performance ratios.

 

The only exception I would make is when combining a good short-term system with a good long-term system. At that point, the primary function of the short-term system is to provide synergy.

 

Are you working on any new projects you can tell us about?

 

I am currently focusing my efforts on developing stock trading systems. I should have some ready for release within the next several months.

 

What do you think is the future in technical stock trading systems?

 

I think there is an enormous future in technical stock trading systems. It’s a relatively new area and I’m sure that many people who lost money in the last several years will begin demanding more disciplined technically oriented stock trading approaches.

 

Do you consider stock systems a viable way to trade stocks successfully?

 

My research indicates that stock systems are definitely a viable way to trade stocks. However, I should mention that the types of approaches that seem to work well for stocks on a large scale basis are quite a bit different from those that work for futures.

 

If you have a preference, would you prefer to trade commodities or stocks on a mechanical trading system? Why?

 

I really don’t have a preference. The ultimate scenario for me would be to create perfectly non-correlated systems trading across both stocks and commodities. This is actually where my current research is heading.

 

What led you to trading systems development?

 

I was a commodity broker for many years. During that time, I had the unfortunate experience of watching many of my clients lose money in the markets. This was very painful on a number of different levels and I decided there must be a better way. That was the beginning of what turned out to be a 10-year full blown research effort into commodity trading systems.

 

You must stay very busy. Does futures trading and programming ever interfere with your personal life?

 

That would be an understatement to say the least. I find doing systems research so compelling that most nights I have to drag myself away from the computer in the middle of the night just to get some sleep!