October 2010 Month-End Trading Report

Dear Investor,

We hope that this message finds you all well. We are pleased to announce that October’s month of trading has again been yet another profitable one!  “Never a dull moment” sums up trading this month. It was full of obstacles, surprises (both good and bad), and in general a good hard month of being down in the trenches and battling it out with the markets. The bad surprise was watching Chrome give up a large chunk of its profit on the last damn day of the month. The good surprise was seeing our “sleeping giant” system McLaren FX bank nearly 30% this month! This was well received. All of our systems have their days to shine, and they all have their dreary days as well.  But working together they compliment each other quite nicely, and the good ‘ol diversification principal proves effective once again this month. We have had some interesting developments which have unfolded this month and we encourage both our current and prospective clients to read through our update in its entirety so that everyone is up-to-date on our latest developments (our apologies for the length).  As always we report the good, bad, and the ugly, we don’t hold back on anything, and we pride ourselves in explaining things as openly and honestly and clearly as we can to our clients.

Our returns for the month of October are as follows…

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OCTOBER 2010 PERFORMANCE (Primary Broker)

Precision FX: +10.36%

Chrome FX: +0.02% (Average of Chrome A: +3.77% and Chrome B: -3.74%)

Mclaren FX: +28.55%

October Average: +12.97%

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Secondary Broker

Precision FX: +1.53% (details on this broker’s performance below)

* Synergi FX: +6.26%

- this is our new strategy (details below). We will not include this in our monthly average until we have it trading on a MAM, where it is auditable. This should begin this month.

* Account Discrepancies – Once again, please remember that if your returns for a given month do not match our posted returns take note that our numbers are from the 1st of each calendar month, to the last trading day of the calendar month. If you have invested in the middle of the month, your numbers may not match ours and could vary significantly. In addition to this, if we have open trades at month-end, we calculate our return on the current balance that day at midnight server time, NOT the floating equity. So open trades which have not realized their PnLs yet will be carried into the next month.

* Please keep in mind that we are now trading some of our systems at two different brokers. We will always have discrepancies between different brokers. For certain systems we have also noticed small discrepancies between larger investor’s accounts (100K+) and very smaller investor’s accounts (<5K). This often has to do with the broker’s min position sizes and how smaller trades are distributed with the allocation software in our MAM/PAMM.

Our Performance Table has also been updated with the following statistics of interest:

MONTH	PRECISION	CHROME	GUARDIAN	MCLAREN	AVERAGE
Dec-08	32.30%	72.73%			52.52%
Jan-09	18.70%	-4.19%			7.26%
Feb-09	27.50%	160.30%			93.90%
Mar-09	29.50%	21.97%			25.74%
Apr-09	-34.40%	61.33%			13.47%
May-09	53.30%	33.35%	3.52%	9.43%	24.90%
Jun-09	23.60%	25.77%	4.69%	30.46%	21.13%
Jul-09	10.10%	20.69%	4.13%	28.02%	15.74%
Aug-09	26.92%	10.77%	4.86%	26.94%	17.37%
Sep-09	-0.32%	5.44%	5.79%	7.83%	4.69%
Oct-09	-4.26%	20.36%	6.55%	11.94%	8.65%
Nov-09	10.76%	-20.98%	30.98%	29.39%	12.54%
Dec-09	9.37%	15.94%	10.39%	7.78%	10.87%
Jan-10	33.63%	27.91%	16.02%	4.30%	20.46%
Feb-10	15.31%	14.93%	22.63%	2.33%	13.80%
Mar-10	15.43%	-5.08%	3.23%	6.75%	5.08%
Apr-10	-8.11%	-9.43%	-0.05%	2.99%	-3.65%
May-10	0.70%	-7.66%	27.30%	21.07%	10.35%
Jun-10	20.86%	10.56%	4.83%	9.68%	11.48%
Jul-10	10.80%	14.57%	6.60%	0.15%	8.03%
Aug-10	5.46%	2.34%		7.35%	5.05%
Sep-10	14.91%	6.13%		1.37%	7.47%
Oct-10	10.36%	0.02%		28.55%	12.98%
TOTAL COMP'D RETURN:	1429.57%	3444.91%	302.76%	752.52%
MONTHLY AVERAGE:	14.02%	20.77%	10.10%	13.13%	17.38%

MONTH-END TRADING RECAP

1. Precision FX - Scalping conditions were rather good at the start of the month again, but dwindled off near the end of the month, where we gave up a bit of our profits in the last week alone. This is of course frustrating when it happens, but it’s the nature of the beast.  We have noticed a trend where the past few months we tend to make the majority of our profits with this system during the first few weeks, and then tend to encounter poorer performance the last few weeks. There is still not enough data to come to any conclusive assumptions from this, but it is something we are taking strong note of.  This system is so well diversified now that usually it’s a pleasure to see it work across all market conditions. We will encounter periods when all of the sub-strategies struggle and that is when the system screams at us due to an equity decline, and we reduce the risk until market conditions warrant a re-adjustment.  We ended the month with a nice double digit +10.36% gain, while realizing a -4.05% peak to peak maximum intra-monthly draw down as the worst dip in the later part of the month.

PFX at our new brokerage - This was our first full month trading this system at our new brokerage.  We certainly did not come out with a bang during our first month here. We encountered quite a few issues and challenges along the way. The month started out great there. Then the broker took down their server for a bridge update. This cost us a little over 1 week of trading being lost (during which time of course the system built up some nice profits at our other brokerage). It finally came back online just in time for us to pick up some loosing trades near the end of the month. To make matters worse, after the bridge update, we noticed quite a few NEW technical problems with our trading platform. This caused some glitches with our systems, and as a result they did not trade as efficiently as they should have, and we encountered some unnecessary losses. While this was also frustrating, we realize that trading at a new brokerage is a major move, and things usually do not work out as planned from day 1. We have been trading at our other brokerage for over 2 years and it took us a while to get everything in order and working like a well oiled machine. So we have to plan for some tweaking to get things working smoothly at the new brokerage (and this includes everything from technical setups, to accounting, to working with clients coming on board etc..). So we ask that clients be patient with both us as well as them as we start a new relationship together. The good news is that the bridge update just as of yesterday has been properly corrected and custom tweaked for our PAMM. So far it appears to be working excellent! We have been told that the update will produce a 300% improvement in terms of execution and price action. So while we had a rocky start, we believe that we have a great future with this brokerage and we are glad to add some diversity to the mix. They are a great group of people, and we believe them to be an honest brokerage (rare), on the forefront of some good things technology wise.

2. Chrome FX – Our Chrome system (both A and B) performed very well for us most of this month … until the last day that is. It seems that this kind of thing never fails in forex (timing). On the last few days we then had an unfortunate turn of events. The last Thursday of the month, we missed closing out the opened trade series by nearly 3 pips. This caused the open trade series to go over night in Friday (which we do not like to do). However the aud/nzd pair ended up moving approximately 420 pips over the course of 3 days leading up to mid-day Friday. This is a huge move for any currency pair, let along a cross pair like this. We made the executive decision to close out the positions instead of risking holding the positions over the weekend, and subject to a further drop in price. This essentially erased most of Chrome’s profits away for the month, leaving it at break even. The trades did end up come back the following week, however we feel we made the right (safe) choice given the circumstances and turn of events.  It was much better to walk away from the month with certainty (break even), then take our chances with uncertainty (potential monthly loss) in an already uncertain market. Capital preservation took precedence here over chasing potential larger gains with the chance of larger losses. Break even sets us back one month, but allows us to attack the markets with a fresh start this month. Overall we can’t be to hard on this system as it has been performing well for us lately. Every system gets caught in predicaments such as this from time to time, its how unscathed you can get out of them that shows the true potential.

3. McLaren FX –  McLaren FX was a real power-house this month, and was not shy about showing us its full potential. It produced a whopping +28.55% gain while realizing only a -2.98% peak to peak maximum intra-monthly drawdown as the worst dip in the month. Pretty much a perfect month! When you look at this track record, you will see that this system goes through slower, but solid periods of moderate growth, followed by nice “growth spurts” such as we have seen this month. As the head developer often puts it to us “nothing like a good month of stress free trading” - and we tend to agree! This account is by no means “action packed”. But it certainly delivers over time. Once again, the best approach with this account, is depositing funds for long-term gain, and letting them work for a lengthy period of time. This holds true for all of our systems really, and not just this one. But those who leave their funds in this system for the year will encounter both slow/steady and growth periods and should be rewarded with some very nice long-term steady growth. We will soon be offering this system at our second brokerage and it should be available there within the next week or so.

INFORMATION AND NEW DEVELOPMENTS

1. New Strategy: Synergi FX – Our Synergi FX system shows some good promise once again banking a return of +6.22%. This is a nice mix of short and long-term strategies and it is poised to go the distance as a good compliment to the existing systems we currently run. This system will be available starting December 1^st (possibly earlier) at both of our brokers for those who would like to come on board and diversify into the system. Clients can come on board whenever they feel comfortable, keeping in mind that the strategy is relatively new. Interested parties should contact us for participation details.

2. Trading More Aggressively? – We have been asked by some of our current and potential investors about dialing up the accounts to target higher returns, or increasing our leverage. We thought that we would address this right here on our update. When you look at our returns since inception for most of our systems, you will notice a slight decline in returns from one year to the next. This is primarily due to us constantly working on reducing the risk profile in our systems as much as we can see fit (yet still targeting above average returns). Working on fine tuning our risk profile often leads to a slight decline in performance, however this type of trading is much easier on the eyes and the accounts encounter much less “swings” (i.e., periods of large gains, and periods of large losses). Every single investor has a different risk appetite, and this often varies significantly from one person to another. We trade one single master MAM account for each system the same way, so of course we cannot please everyone’s risk appetite in it. Instead we try to make our MAMs suitable to the average sophisticated investor looking for an edge in growing their assets at an aggressive, yet responsible pace.

Some of us often get spoiled with forex, with the lure of big returns. We are focusing our business model solely on longevity above all else, and not trading with a “dooms day” strategy is one way to ensure we be able to build an attractive and lengthy track record over time. Many aggressive systems out there come and go almost over night – we have witnessed this first hand, and tested many ourselves. They have the potential to bank thick returns but also to blow out accounts shortly after. To put it into perspective, what good is it to make 1000% if you loose 100% the next month? We have been down this road before, and are very happy with targeting moderate gains keeping our profit targets absolute. If we can double a client’s account in a year fairly safely, and by using good risk management, then we consider that a huge victory! Large hedgefunds are considered to be “elite” if they produce 20% + for their clients per year. Trading larger sums of money makes it much more difficult to target higher aggressive returns, and there are many factors at play (technical, social and political pressures) which make the aggressive profit targets difficult to achieve for large asset holders. We consider ourselves to be medium sized, and are already starting to keep a close eye on these concerns and plan for them, such as liquidity and execution. We are approaching certain thresholds on some of our systems where we must keep our risk in check, to prevent certain problems from occurring. So to get back to the original point, unfortunately for those who have asked, we will not be increasing our risk or our leverage on our systems. In fact, we will likely be focusing on the opposite which is lowering our risk exposure as our funds grow in size.

3. Incremental Minimum Investment Increases – Just a friendly reminder to all that as of today November 3rd, we will be implementing a small increase in our initial minimum investment amount for new investors. We will be increasing this from $5,000 USD which is our current minimum, up to $10,000 USD as the new minimum.  Take note that clients can invest 10k with us, and spread it across all of our systems. So we will not make it 10K per system, so that clients can still diversify across all of our systems with the minimum investment. Our next increment will be increasing to $25,000 USD, which right now is slated for January 1^st, 2011. Those in the process of opening accounts can still come on board for the minimum of $5K, but new investors from today forward must reach the $10K minimum.

4. Long Term Trading Success -  This is a very important subject that we are going to eventually write a full article on for our investors. Trading the Foreign Exchange asset class, contrary to popular belief is extremely difficult to do. It is even more difficult to stay profitable consistently. There are so many factors at play working against traders. 1. The markets themselves (these are ever-changing and becoming trickier than ever to trade - markets are very elastic-like right now). 2. Technical issues (one of the toughest parts) - in terms of your strategy development and implementation, programming, and platform functionality, testing environment etc... 3. Brokers (probably THE most tough component of all) in terms of finding an honest one that can provide all the technical requirements needed, get the right feeds, leverage, spreads, execution, work with managers, and on top of that not be a crook!  4. Regulators – in terms of bringing in restricting regulations as apposed to enabling ones which allow traders to be profitable. We have seen this happen in the USA this past month. There is a plethora of restricting regulations surrounding FX in the USA – none of them enabling. The point is that trading FX is tough enough, then when you factor in everything else, it becomes a borderline nightmare sometimes. You need many things to come together at once for it to work properly. 

Taking this into account, as an investor, there are a few key things to consider in terms of actions and expectations. The first and most important is to have realistic expectations. Read above the trading more aggressively section. We all get spoiled with forex sometimes. There is of course the possibility of big returns, but not without eventual big losses as well. Realistically speaking, when compared to any type of traditional investment (and even most alternative investments) a 3% return per month is outstanding! Obviously more per month is better, but it should always depend on the amount of risk taken. Investors should always keep this in mind, and it put it into perspective. 

Secondly – diversify your funds. We are pretty sure that we do not need explain the benefits of this to our investors. But the safety it provides is indisputable. We provide multiple systems for a reason. We propose for all of you to take advantage of them.

Third – expect to weather a few storms. Investors on board for the course of a full year, should expect to encounter a storm or two over the course of a year. This could be anything from some huge unannounced and unexpected news events impacting the markets, to something so large that it causes a brief financial meltdown. We have had the “pleasure” of trading through both of these conditions. Traders around the world with open positions when this happens, are exposed to EXTREME movements, and can often expect worst case scenarios to hit (full SLs). Being able to dodge these, or predict when they happen is next to impossible. Having safety measures in place for when/if they strike and you are caught is the best thing one can do to prepare for it. Some people luck out and profit hugely from these, and others avoid them altogether. But when you look at the period of 1 year, chances are good that most traders will ride through at least a few storms to some degree. We have done a great job this year so far in avoiding these and being prepared for them (before you say it – we know, the year is not over yet).

Fourth – let your funds sit and compound. We have some investors who seem to shift their funds around from one system to another chasing the best performance from month to month. This is the fastest way to have your account eroded into a non-performing account. The best plan in our opinion is to commit your funds for a pre-determined period of time, and allow them time to compound and trade through a few different market conditions and seasonal cycles. Most of our systems go through various periods of grand performance as well as periods of poor or stagnant performance.  It is our job to focus on making the grand months out-weigh the stagnant months, but we can never know when they will shift. Clients with a longer-term approach will ALWAYS do better than those constantly shifting their monies around, and many of our clients have experienced this first hand. There is much more one could factor in than this, but this should at least help clients new to these types of investments with their decisions and expectations a little bit (at least we hope it does). We will touch more on this next news letter or mid-month. For what we are doing to keep working, it needs to be a win win scenario for everyone (us, our investors, and even our brokers) and we want to ensure that all parties have the best odds in their favor for being profitable long-term.

 SUMMARY

We are happy to report a positive and profitable update once again this month to our clients. We hope you have all taken the time to read the above section on long-term success. We will be doing everything we can on our end to ensure we achieve this. In the meantime we are looking forward to heading into a profitable November. As always we will do our best to communicate with our investor base whether in the form of monthly updates, or on a “per needed” basis as we go through the month on any issues which may present themselves. Please visit our website and blog for frequent updates and newsletters (note: we are always adding new content to our website) and do not hesitate to contact us at any time should you have any inquires or concerns you would like to discuss with us.

Thank you to all our current investors for your trust once again in trading with us. We are looking forward to wrapping up the final quarter of 2010 making it a good one!

Warm Regards,

The Cayo Flow Team