November 2011 Month-End Trading Report

Dear Investor,

We hope that this message finds you all well as we enter into the final month of the year! And wow.. what a year it has been! One of the craziest and toughest that we can ever recall, from markets in general, to the economy, to crashing brokers, to crises, you name it. We wouldn’t say it’s been just weathering storms this year. It has been more like trying to navigate your way through quick sand, exploding volcanoes, crazy earthquakes, tsunamis, and typhoons, when you are used to just leisurely walks in the park with the odd uphill climb. We would like to discuss a little about our trading moving forward in this update, and also our new brokerage. This is quite important and more details will be found below in this correspondence so we hope you all take the time to read through it.

This past November is best described as a good month, but with a surprise slap in the face at the end. Our average would have been much higher than it is, if it were not for the last day of the damn month (Nov 30^th) where we witnessed a planned and coordinated central bank action to boost liquidity. This was the doing of the Fed, ECB, and the Central banks in Canada, Japan, England and Switzerland etc... This essentially caused us a huge hit triggering many SL’s on most of our systems in a matter of minutes, and up to a -6% loss on both MFX and PFX, which were both wrapping the month up nicely in double digits prior to this. It was a very frustrating way to end an otherwise good month.  We are still positive on our average so cannot complain too much. This has been the story of our lives this year. Our final numbers for the month of November are as follows…

SYSTEM	OFM
Precision FX	6.01%
McLaren FX	5.21%
Vega FX	-7.57%
November Average	1.22%

* 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 take note that while our returns are calculated from 1^st of each calendar month to the last trading day of the month, our performance fee period (the period in which high water mark performance fees are calculated on), is from NFP to NFP. NFP is the non-farm payroll and is the first Friday of each month.

Our complete Performance Tables will also be updated with the following statistics of interest (broken down by brokerages) on this following page: http://cayoflow.com/performance.html

MARKET NEWS

Well, things are getting messy again. It’s going to be interesting to see how things fair out particularly in 2012. Nov 30th was a huge eye opener for us to show that the current state of affairs is not one particular nation’s problem. “We will all go down together” is the general vibe right now.  Some of the top experts in the industry say that Europe isn’t facing a liquidity crisis. But that the world is facing a structural solvency crisis in which businesses, governments and individuals have all borrowed money — and made promises — that cannot be repaid unless more money is printed (or, more specifically, until more credit is issued). Rather than fill the newsletter for those who are already up to swing, or those who don’t care (hope not to many as this effects everyone whether they “feel” it or not) so here are some of the better highlights from the last few days on what’s happening around the world on this topic ...

1.       Euro doomed from start, says Jacques Delors:
http://www.telegraph.co.uk/finance/financialcrisis/8932647/Euro-doomed-from-start-says-Jacques-Delors.html

2.       Banks Ponder on Scenarious if Countries Drop the Euro: http://online.wsj.com/article/SB10001424052970204826704577074773960813432.html

3.       Time of Reckoning for the Euro Zone:
http://finance.yahoo.com/news/time-reckoning-euro-zone-200335895.html?l=1

4.       Why do Foreign Banks Need Dollars?
http://economix.blogs.nytimes.com/2011/12/01/why-do-foreign-banks-need-dollars/

5.       Germany is the ultimate victim of EMU
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100013600/germany-is-the-ultimate-victim-of-emu/

MONTH-END TRADING RECAP

There is not much to report on this front, which wasn’t already discussed above. This month 2 of our 3 systems performed remarkably well, with the exception of the last day of the month. Vega has been the system struggling a little more than the others lately. Last month we saw a 15 day stagnant stretch on the EUR/USD pair, which had a huge effect on Vega. This system needs market flow to do well. When there are no defined trends or breakouts its very tough for 2 of the 3 models in it to be profitable. The scalping component will always do well in this scenario. Other than that, the trading went as expected. We had some terrible whiplash spreads from our broker that caused some problems, but since they are passing things through directly to us there is not much we can do there. This month is looking to be off to a good start as well, particularly on the McLaren FX front.

BROKERS

We will update individual clients after our month-end newsletter as to the current state of affairs with our old brokerages. Things are moving along quite well with our own brokerage and we are looking to be live and moving full steam ahead with this in the new year. There has been a tremendous amount of time and effort and money and help poured into this, and we feel we will be securing a very nice part of our future in the FX industry with it.  Our current brokerage (OFM) is filling the gap well for us right now, but our early testing shows we can be much, much, much more profitable with our own setup, as the technology behind it is leaps and bounds ahead of our current one (and most others for that matter). We are essentially piggy backing off of a lot of hard work and a lot of spent dollars, and the fact we will have exclusive access to this on a retail scale, be the only firm with an MT4 platform plugged into it, and the depth of market available is going to give us a huge edge. Some of you have been helping us with the beta testing. Others have been asking many questions. The most common one being, is this broker owned by Cayo? No, it is an entirely different venture altogether. Some of our partners are a major stake holder in the project, but it is separate from what we do here, and we have different partners involved as well. As we get closer to being ready we will explain more. For now we are working our tails off on it, to make it the best it can be, and take our reliance out of the hands of other 3^rd party providers entirely, and build a safe haven for us to trade and grow our funds for a long long time. We have simply been through to much crap to rely on others to clear our trades.

TRADING FORWARD

Current Trading Risk: Some of you have been emailing us asking about our returns and why we are not chasing huge numbers like we were about 2 years ago. This isn’t the first time this has been asked. But we feel we can better address this now, more than ever.  There are really many reasons for this. Much to do about risk, changing markets, and investor mentality. But we believe the whole market, for investment, has changed in the last couple of years, especially this year in particular. Certainly when we were running our early programs all those years prior to now, it was all about the returns! Clients wanted exceptional returns of 100-200+ % a year and they were quite happy to eat an occasional 30% drawdown to achieve this. This was when retail FX was a little different and a little newer to most people as well. Now, with the global credit crunch, and the craziness in the markets, everyone just wants their money back. It has got to be a play-off, with returns versus drawdown.

Previously it was all about shooting the lights out and taking bigger risks, but the vast majority of clients just don’t want the drawdown risk at the moment.  It is more about the steady return with a controlled drawdown. Basically, these days, it’s the risk before the return. If you are the other way around, you are an exception these days. This is not just in FX, but in markets the world over and across all asset classes. With brokers, institutions, banks, govs, and entire countries not managing risk properly we have seen some crazy things happen lately, which we want to avoid altogether.  This includes small scale (like what we have seen with Sparen FX) to large and extremely large scale (like what we have seen with MF Global). So will we be targeting large numbers going forward? Not like in the past, and not with our current systems. If we approach intra-monthly draw downs approaching the 7-10% mark, depending on the system, we will most likely turn off the system for the month. Our profit targets will not be as high as they were in the past either. We are looking to target the 5-10% range. We have potential with the current systems to see 20% ish per month on good months like last month. But not much higher. We want to be clear on this to our clients and prospective clients so as to not provide inaccurate expectations amongst people. We may in the future roll out an aggressive system for those who keep asking for one, but we will wait to see how things transpire in the New Year. We try to optimize our risk for moderate gains, which cater to a wide audience.

Diversification: We have mentioned this quite often in the past, but thought we must bring this up once again, as it is more important than ever lately. Our systems are designed to work together. By this we mean they are meant to cover all types of market conditions. We have never forced this upon our clients. Instead we leave it up to them to do. We explain to them how it works, and for most of them it clicks and sticks instantly. But we still see some who chase after each winning system monthly (or even in shorter intervals). These constant adjustments effect the outcome largely. Our strongest recommendation remains the same. To split your funds across all of our systems equally, allow them to work as one synergistically, and let them ride for 3 months before making any adjustments. This has proven to be the most time tested, safest, and most profitable way of utilizing these strategies to make money in the markets. They have been tweaked and modified and have come a long way to where they are today. So even though they are separate, it is best to think of them as a basket of essentially the same synergistic product. We see the mitigation of risk all time between systems. i.e., one strategy is short euro dollar, and the other is long. This is essentially a hedge between systems. So if you lost on one, the other should help to offset it. Keeping net balances across the systems more level. This happens in single systems as well, but to a larger part across the separate systems.

New Strategy: We have been working behind the scenes to bring a 4^th strategy into the mix that is entirely different than our current ones and adds further diversification. This is near complete, with just a longer live testing period going on.  Once we are ready to go live with it, it will officially be one of the most simple and effecting strategies we have, and, that we have ever used to date. Sometimes simple is good ;-). The system trades the G7 pairs, and places about 40 trades per day following a very simple and effective form or pattern trading, which is proving to be very nice to us, on both back test and live forward test. We will keep all our clients posted on the progress and launch date for those interested in participating.

SUMMARY

We are glad to be in touch on these subjects with our clients as we feel the direction of the markets is changing day by day and month by month. It is a difficult market to navigate these days. We need to expect rough patches in the market, and not panic when they strike and believe in our strategies (which we do more than ever).

We know from our live and back-test process and the simulated results that we’ve got a good basket of strategies. Our tests and research and modifications are all done for a reason. They allow us to benchmark our live performance. So as long as the models are performing well within their KPIs and within our benchmark parameters there is no reason to change anything. This was our problem throughout much of this year, as soon as we seen a model not working for a week or a month, we went to tweak it, which of course ran the risk misfire the following month. This was an obvious reaction to what we saw this year. But we have matured quite a bit in our trading because of it, and continue to do so. We only make adjustments quarterly now when warranted.

We have been through a lot with many of you this year. It has not been a year without some very tough issues. But we will continue learning and pushing forward (we are a stubborn bunch). This brokerage we are working on is a very new and exciting venture for us which are quite excited to share with you. But we are still traders at heart and will always be doing what we do on the market front. It will just be done in a safer and more profitable environment now which is only going to make things better.

Holiday Trading: We typically play this by ear and quite often go full steam til about mid-month, and then cherry pick trades throughout the holiday, firing back up full steam in the near year. Whether we do the cherry picking and to what degree will largely depend on how things are shaping up. Historically speaking the week between xmas and new years has been THE most profitable week of the year for scalping, but terrible for other strategies. So if you see few or no trades taking place on any strategies at anytime this year, it will be normal, and should resume as usually in the new year. So we will get a plan together for this month, and stick to it, and touch base with you next year!

We would like to wish you and your friends and family a warm holiday season this year despite all the things that have made 2011 a outlandish year for the masses. We hope you have time to enjoy some of the finer things in life with those who are close to you.

Warm Regards,

The CayoFlow Team

October 2011 Month-End Report

Dear Investor,

We hope that this message finds you all well as we enter into the month of November and winter begins to come upon many of us in the northern parts of the globe. We will keep this update short and to the point. This month we are glad to post our numbers as we have a full deck of positive numbers which is a nice sight to see in the current economic environment. We have stopped trading at Inovatrade brokerage half way through the month (more details below) which is why you see the discrepancy in returns, but still ended up with a positive posting. Our numbers for the month of October are as follows…

SYSTEM	OFM	INOVA	Broker Average
Precision FX	16.91%	6.82%	11.87%
McLaren FX	19.40%	4.66%	12.03%
Vega FX	8.04%	4.37%	6.21%
August Average	14.78%	5.28%	10.03%

* 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 more than one broker. We will always have discrepancies between different brokers no matter who they are. For certain systems we have also noticed small discrepancies between larger investor’s accounts (100K+) and smaller investor’s accounts (<5K). This often has to do with the broker’s min position sizes and how smaller trades are distributed or rounded with the allocation software in our MAM/PAMM. Please take note that while our returns are calculated from 1^st of each calendar month to the last trading day of the month, our performance fee period (the period in which high water mark performance fees are calculated on), is from NFP to NFP. NFP is the non-farm payroll and is the first Friday of each month.

Our complete Performance Tables will also be updated with the following statistics of interest (broken down by brokerages) on this following page: http://cayoflow.com/performance.html

MARKET NEWS

Without a doubt the biggest news this past month has been the Greece saga (surprise). This has in our view been dragging on for way way to long.  There is something new changing every day, and even multiple times per day (such as today).  While this has been dragging on for a long time, many are describing the current state it’s at today (in all it’s severity) as “Greece holding a loaded pistol to the temple of the global economy”. The constant back and forth has been wreaking havoc on the most liquid FX pair (EURUSD). There have been some crazy sell-offs and whiplashes, and nearly all of them have stemmed down to the Greece saga and the Euro zone in general.  We are not going to get into the whole politics of it as we think its ridiculous. We think that the Greece episode is just the beginning of Europe’s problems. Greece is just going to pave the way to what will happen to the other vulnerable Eurozone economies like Italy and Spain and Portugal for example.

The ironic thing about governments going bust is that it has been happening for centuries. Default is nearly as old as the monetary system itself, and history is ripe with examples of it.  For example, Spain has defaulted 15 times since the 16th century. Greece has defaulted 6 times since the 19th century. Portugal has defaulted 8 times since the 16th century. This crisis however is much more severe in that many countries are all connected at the hip this time around. It’s basically just a big game of musical chairs that won’t end, and once the music stops, a country is left standing in the dark.  We believe this is only the start.  When Spain, Italy, Portugal, and even Ireland's debt crises’ speedily arrive, it will be dealt with just the same way: Print -> Lie -> Borrow -> Deceive -> Deny!  We of course hope that that isn’t the case but cannot see it otherwise.

On other notes, the G20 meetings are under way, and while there were to be many agendas, it really has turned into a G-Europe conference. The western governments and other nations are likely sitting on the sidelines with their jaws on the floor. While this is supposed to address global issues, reports say it has a large focus on the Greek crisis and other Euro troubles. We are keeping a close eye on how all of it has been and is affecting the markets.

MONTH-END TRADING RECAP

Without getting into to many details, we had for the first time in a while a rather smooth sailing month of trading. Everything worked. We had no technical problems. And markets were friendly to us. This month we are seeing volatility pick up a little again, but it’s still early. Our guess is that this Euro saga is going to cause some roller coasters. We are up already with PFX and MFX, and down slightly with VFX.  Again, we cannot stress enough to traders to diversify their funds across more than one system. Diversification always keeps the ship afloat. In month’s where we are positive across the board, its not much of a concern but during periods where drawdown is encountered it usually smooth’s the ride a little. DST has went into effect in Europe, and goes into effect for most of North American markets this Sunday. This usually has an impact on our trading, especially our scalping which is time dependant. We usually see a little turbulence at the start, and then settling out after that. We will again be keeping a close eye on things.

BROKERS

We are now officially down to our last man standing – OFM brokerage. We trade some private accounts at CITI and Swiss Quote, but for the most part we are keeping everything at OFM.  We officially stopped trading at Inovatrade this past month. This has been a troublesome and crazy time for brokers. One of the largest Brokers in the USA (MF Global) has just went bankrupt! The company filed for bankruptcy, just days after posting a $192 million quarterly loss and disclosing $6.3 billion in bets on European government bonds. There are some heads rolling due to this, and it ranks up there one of the larger bankruptcies in the history of the US. We know quite a few people who invested there. As many of you know we have also stopped trading at Sparen FX and are taking the appropriate measures there. We have also just this week decided to stop trading at Inovatrade. We do not know what to expect in this situation, but we cannot continue to trade at a brokerage which does not communicate with us. It’s like flying an airplane with a blindfold on. We have heard various different suggestions and rumors as to what is happening here. We have heard that communication cannot be resumed until the Panama securities commission has completed an internal audit on the company. We have also heard that they have folded shop. We do not know much more at this point, only that we cannot continue to trade there without having full communication and accountability. Our primary point of contact Mr. Michael Alcocer has not been responsive to any of our attempts to speak to him about the status of the brokerage. We will continue to press for information on this, but in the interim have ceased all trading activity there, and highly recommend other parties trading there to follow suit. The brokerage industry has been an absolute mess in 2011. No doubt some of the global economy has been responsible for much of it, but we also believe there has been some terrible mismanagement with some of these other firms. We are doing what we can to get some resolve and filter out any more potential problems from arising in the future.

SUMMARY

To re-iterate from last month, the best news we have lately is that we are for certain setting up our own brokerage. It will be done right. It will be good. And it will be everything we ever wanted in a brokerage. For years brokers have been our biggest obstacle, hurdle, source of frustration, and root cause of lost funds. We are following the rule of “if you want something don’t right, you need to do it yourself”.  We will provide more details as we near completion. This is a time consuming and costly endeavor. But we are making some good strides on this front, and are getting rather close to completion and believe we will have something very special when all is said and done.  This will be our “in house” setup where we will not be reliant on other FCMs ever again.  In the meantime we are working on bringing some resolve and fixing the problems with the current ones, and implementing better longer-term and sustainable solutions. Our trading programs are running as they should and we have stopped the constant tweaking of them. This is a very tough market at present, but we will keep the battle going strong on our end. We will continue to monitor our systems and take what the markets give us.

Please visit our website and blog (http://cayoflow.blogspot.com/) for frequent updates and newsletters and do not hesitate to contact us at any time should you have any inquires or concerns you would like to discuss with us.

Warm Regards,

The CayoFlow Team

Sept 2011 Month-End Trading Report

Dear Investor,

We hope that this message finds you all well as we enter into the month of September.  Our apologies for the delay, as mentioned previously we will shorten our updates down significantly. We will keep this update short and to the point as we have a lot on the plate to deal with on the brokerage front.

Markets are again all over the place. The Greece saga continues to worsen. Things continue to worsen very much so in the entire Euro Zone with Spain and Italy popping up as big dots on the radar. The Occupy Wallstreet movements are taking over many cities the world over from Australia to Canada to much of Europe.  Rather than write our own commentary we figured we would share some links to some good videos and articles on the subject with you this time around.

* A MESSAGE BY “ANNONYMOUS” FROM THE OCCUPY WALL STREET MOVEMENT:

http://www.youtube.com/watch?v=j5xRaQnHGA0&feature=player_embedded&noredirect=1

For those not following this, we found this particular video to be outright “bone chilling” and quite CREEPY! But they send a very strong and clear message in this clip. This was sent on October 1^st, and the movement has changed and picked up quite a bit of momentum since then.

* HOW TO EXPLAIN GREECE TO A COMPLETE IDIOT / POLITICIAN:

http://www.sovereignman.com/expat/how-to-explain-greece-to-a-complete-idiot-politician/

This is a message written by Simon Black at Sovereign Man. This is very good and puts the Greece debacle into a very clear and simple perspective for people to understand.

* IMF ADVISOR SAYS WE FACE A WORLDWIDE BANKING MELTOWN (how it would affect the everyday person): http://www.youtube.com/watch?v=6UGDTtqklSo&feature=player_embedded#

Dr. Robert Shapiro who advised Presidents Clinton and Obama and who currently advises the IMF predicts a cascading meltdown of the World's banking system starting with Sovereign debt in the Euro Zone, affecting the UK then finally bringing down the global banking system. This clip was aired October 5, 2011 on the popular News show Newsnight with the corporation's top interviewer Jeremy Paxman.

As most of us can see tensions are still sky high.  FX Markets are tense, but showing small signs of regularity according to the “gurus” who claim they really know about this kind of thing. People seem to be awakening to many of the problems we are all facing (not just Greece or the countries in the spot light right now). Are we are on the brink of some kind of change? Or some implosion? Or do we have a ways to go before we hit the rock bottom? Its tough to say and everyone has a different perspective on it. We always say its best to be safe, and be prepared, but not paranoid either. Times are changing and changing very fast. We feel that something must give (aka break) before we see any kind of true improvement on this whole debt situation – the world over. When or to what degree that is, we are still unsure.

Last month’s trading has been “OK” depending on the system and the brokerage as we had some very large broker discrepancies for various reasons. Trading continues to improve quite nicely into this month. Our McLaren system is approaching 20% already this month, and the other systems are positive as well. We are the most dedicated and stubborn group of people though and will never stop tweaking, testing, trying to improve, and trying to eliminate our problems until we get things to the best possible place they can be.

Our returns for the month of September are as follows…

SYSTEM	OFM	INOVA	Broker Average
Precision FX	-6.47%	5.87%	-0.30%
McLaren FX	0.12%	-13.20%	-6.54%
Vega FX	13.69%	-0.49%	6.60%
August Average	2.45%	-2.61%	-0.08%

* 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 more than one broker. We will always have discrepancies between different brokers no matter who they are. For certain systems we have also noticed small discrepancies between larger investor’s accounts (100K+) and smaller investor’s accounts (<5K). This often has to do with the broker’s min position sizes and how smaller trades are distributed or rounded with the allocation software in our MAM/PAMM. Please take note that while our returns are calculated from 1^st of each calendar month to the last trading day of the month, our performance fee period (the period in which high water mark performance fees are calculated on), is from NFP to NFP. NFP is the non-farm payroll and is the first Friday of each month.

Our complete Performance Tables have also been updated with the following statistics of interest (broken down by brokerages) on this following page: http://cayoflow.com/performance.html

MONTH-END TRADING RECAP

Without getting into to many details on this update, we had a lot of struggles last month again. We spend a large portion of the month having our systems re-coded from one language (an older one) to a newer one. We had found some errors in the strategies that caused some very minor problems and discrepancies this month which have all since been rectified. Our new language for the systems will take some extensive testing but we will eventually migrate things permanently. Our brokers also had quite a few problems from their liquidity providers this month, in turn causing us probs. There were a few misquotes by several large banks last month (namely Goldmans), which caused huge erroneous market moves that had to be audited and corrected. Thankfully our brokers did this in a rather swift fashion. Our Vega system ran perfectly well at OFM brokerage, but had troubles at Inova. This is turning into a very nice stable system, and the same goes for all 3 now. They are on lower risk, and are set to just “trade” through whatever the markets throw at them. We are off to a good start in Oct, and hopefully without any storms rolling in we will end this month on a much needed nicely positive note.

BROKERS

This is always our section where we rant and vent like disgruntled employees who hate their bosses. We are so frustrated with brokers we are going to permanently give it a red heading color until we have officially removed all the scumbag brokers from our life (the vast majority of them are scumbags) and only have good ones we are associated with. We are sick to death of dealing with brokers. They suck up more time and energy from us than any other component of our lives. As many of you know, we are have started to take legal action against Mark Edward Rice the director of Sparen FX, who has still not returned ours, our investors, and virtually every other trader, IB, and account manager who has ever traded at Sparen FX our hard earned funds. This has been one of the single most frustrating episodes we have been through in the past 4 years. It is quite a big deal given the amount of people involved. But we are not about to sit aside and let him get away with this at least without a fight.

In other news, ironically, and almost unbelievably actually, things have seemed to have gone from bad to worse with Inovatrade, another Panamanian brokerage headed by Mr. Michael Alcocer.  Customer service has been almost non-existent lately; emails and phones are not answered (or take very long to be answered). Many wires are pending with longer delays.  We are looking into the root causes of the delays, and are hoping we do not see them follow the same path of Sparen FX.  We have our hands completely tied at the moment with what is happening with Sparen. But should this not improve, we will certainly follow suit here and take action. We are planning to travel to visit them in person very soon. The good news is that Panama is now adopting a form of regulation for FX which should really help things in the future. A penny short and a day late perhaps for some firms. But it is a step in the right direction for the jurisdiction nonetheless.

One Financial Markets in the UK has been a true pleasure and the breath of fresh air in this whole brokerage mess. Never again will we ever so much as look at a private brokerage. I know that there are some good ones out there. But it is not worth it in our view for the potential of what can happen. The original draw which attracted us and many other systematic traders to private brokerages in the first place was essentially their feeds (usually unmatched by any regulated brokerages).  While they could often provide an extremely high quality feed, when there is no regulation over how they run the internal workings of their business, other people, or greed, or mismanagement, or misappropriation seem to eventually set in like a cancer to many of these firms. Because of this we are presently only working at OFM in the UK who have been quite good to us, and accommodating, despite regular brokerage problems which always seem to happen from time to time.

I suppose the best news in all of this is that we are for certain setting up our own brokerage. It will be done right. It will be good. And it will be everything we ever wanted in a brokerage. For years brokers have been our biggest obstacle, hurdle, source of frustration, and root cause of lost funds. We are following the rule of “if you want something don’t right, you need to do it yourself”. We will provide more details as we near completion. In the meantime we are working on bringing some resolve and fixing the problems with the current ones, and implementing better longer-term and sustainable solutions.

Please do not hesitate to contact us at any time should you have any inquires or concerns you would like to discuss with us.

Warm Regards,

The CayoFlow Team

August 2011 Month-End Trading Report

Dear Investor,

We hope that this message finds you all well as we enter into the month of September.  Our apologies for the delay, as mentioned previously we will shorten our updates down significantly on the monthly updates and get into more details on the quarterly updates.

In the last month we were positive across the board, well unfortunately in August we were negative across the board, in what ended as being a “month from hell”. They say history sometimes repeats itself; well we are here to tell you that the month of August was like October 2008 all over again. This whole year seemed to lead up to August as grand slam of financial anarchy. Aside from the meltdown in the markets in August, murphy’s law struck us in so many ways it was ridiculous actually ridiculous, and makes it especially painful for us to post a -13.06% broker and system average for the August (our worst yet this year).  We had not only chaos in the markets to deal with, but we had many technical challenges this month (server problems, license problems, and brokerage problems) which caused quite a discrepancy in our results from one broker to another. Unfortunately this caused us to witness some of our max monthly thresholds last month in terms of negative performance (aka – our worst case scenarios) which we never like to see.

So on the news front, after August we thought things couldn’t get any worse in terms of the USA and most of the Euro zone, and then unbelievably the Swiss decided it was their turn to “join the party”!!

If you didn’t hear the news, in the first week of Sept the Swiss National Bank surprise announced that it is putting a ceiling on the Franc's appreciation against the euro - effectively abandoning its economic sovereignty and putting its future in the hands of corrupt and inept bureaucrats.  Due to this news, in the FX market the Swiss Franc virtually fell off a cliff, dropping almost 11% in a matter of minutes (literally). We watched in awe as the USD/CHF moved over 700 pips in about 30 mins! Some people surely made huge money from this, while others likely lost it all. Gold priced in Swiss francs jumped about 10% in 30 seconds as well.  Thankfully we were not caught up in any of this and were sidelined. Either way this is not good news and the Swiss government has basically told the world that they will print as much money as it takes, and buy up as much crappy sovereign debt as they can, to competitively devalue their currency.  Many who thought the Swiss Franc to be one of the last solid currencies have now agreed that precious metals are all alone as one of the only real forms of sound tangible currency.

So, it's been a tough few weeks for many traders for many different reasons in the markets. It's not been a great summer in general this year for most of the major currencies with the unprecedented financial turmoil back and forth in the US and Europe.  Then factor in the riots, and natural disasters and it's certainly been a huge pill full of events to swallow lately!

We know at times like these you hear droves of people coming forward to bark at how terrible a time of the year it is to trade. We don’t think this is a cover up for bad results, and we certainly do not look for excuses in our trading performance. But August historically is a poor time of year to trade in the FX Markets, and this one just happens to have been the worst one we have ever seen to date. We only hope things are FINALLY settling down now.

But it is not all doom and gloom, and we do have some changes and good news to report which we will explain below. But we are coming up to a new period now (September to December) which is the tail end of the 3^rd quarter and blunt of the 4^th quarter which historically we have found to be a pretty decent time for trading. There are a lot more players (and hence liquidity) which returns to the market from the summer holiday, and this normally gives us a good run of reliable price pattern formations and proper trends. This coupled with the fact that we believe and really hope the financial drama has reconciled for at least a little while; makes us believe that by proceeding with caution we should see some good conditions ahead.

Our returns for the month of August are as follows…

SYSTEM	OFM	INOVA	Broker Average
Precision FX	-15.24%	-25.03%	-20.14%
McLaren FX	-14.04%	-2.70%	-8.37%
Vega FX	-0.41%	-20.93%	-10.67%
August Average	-9.90%	-16.22%	-13.06%

* 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 more than one broker. We will always have discrepancies between different brokers no matter who they are. For certain systems we have also noticed small discrepancies between larger investor’s accounts (100K+) and smaller investor’s accounts (<5K). This often has to do with the broker’s min position sizes and how smaller trades are distributed or rounded with the allocation software in our MAM/PAMM. Please take note that while our returns are calculated from 1^st of each calendar month to the last trading day of the month, our performance fee period (the period in which high water mark performance fees are calculated on), is from NFP to NFP. NFP is the non-farm payroll and is the first Friday of each month.

Our complete Performance Tables have also been updated with the following statistics of interest (broken down by brokerages) on this following page: http://cayoflow.com/performance.html

MONTH-END TRADING RECAP

Without getting into to many details on this update, we really had a lot of struggles last month. We dedicated countless amounts of hours and hours to trouble shooting a few problems, which turned into a huge time drain for us. This is the nature of the beast however, and nothing every runs smoothly forever. Our systems were causing us problems after an applied update. Our trade servers were crashing also after an update for quite some time without reason, and one of our brokers (Inovatrade) went through various technical challenges too. When all the chaos landed on and off in the markets, it made for a month we really would rather not ever re-live again. But we plowed through these issues and with some help we were able to eventually solve all problems and get things well under control into Sept. We have some news on this front in the section below…

IMPROVED TRADING PLAN WITH OUR SYSTEMS

We take our trading very seriously, and we went last month to meet in person with a very high profile and well respected manual trader. During his career he traded various instruments on Wall Street for multiple institutions, and now he teaches and consults and has always been a big role model to us as we have spoke with him in the past. We ended up meeting with him in person last month, and asked for him (and paid for him) to review our full list of strategies and systems. And he did with a fine tooth comb (took 3 days). We conferenced in our programmers and partners, and it was a very very productive and informative session.

One of the most important things we identified from this workshop was that the majority of our strategies are actually really sound and very well put together. He identified that our biggest problem was not in the strategies themselves, but was more in the rate at which we changed our strategies around and on what basis for doing so. What we have essentially been doing this year is changing strategies around once we encounter a tough period, and then move on to implementing other strategies which have been performing well. What happens in this situation, especially with volatile markets, is that when moving to the best performing strategies at the current time, you usually end up moving to it when it is about to struggle (based on that all strategies go through performance cycles – since the markets themselves go through cycles). Meanwhile the strategies that you switched FROM due to poor performance start to begin performing well again. We of course know and understand this concept quite well, but have not been the best at implementing it ourselves this year. Probably because markets have been changing so much and so drastically, we have been fighting hard to adjust and adapt.

We do not claim to be the best in the world at what we do, and strive to keep learning, progressing, and improving so this was a nice eye opener. What we ended up doing in terms of implementing a new go forward strategy, was to get assistance in sub-diversifying each strategy, turning down the overall risk, and letting the systems run hands free for a longer duration of time. We picked up an additional automated strategy used by our contact as well which was a nice added bonus for us ;-). But for the most part our systems are better diversified, are “set n forget” mode on quite a bit lower risk, and will have set checkpoints in place on when we may look to change a strategy around. Overall we think that this is going to be quite a nice change to things. These systems will ride out through the good and the bad, but it will be far less of a rollercoaster ride, and we should catch some nice winning streaks through time.

BROKERS AND NEW DEVELOPEMENTS

While this is normally the biggest section of our updates and our biggest source of complaints, we are going to spare people from that time and time again. We have come to the inevitable conclusion that if we really ever want to be long term profitable, and make our lives easier, we need to open our own in house brokerage – and after much thought, this is exactly what we are doing!! No one has been screwed around more, wasted more time and effort and money, been through the ringers more, and witnessed the worst services and dirty and illegal tricks brokers pull than us. It makes our job very very very tough. We are fed up, and have decided to bite the bullet and move into doing our own clearing and trading. We are a little ways away from this but we are fully committed to it, and have begun to lay the ground work.

In the meantime, Inovatrade has increased their spreads by 2 pips. Things have slowed down there in terms of their service and wires. We know some of the reasons for this but it seems they often have a hard time keeping their ship in order. OFM on the other hand has been amazing and continues to improve! Their feed improves, their service is impeccable, and they are a very well known and heavily regulated UK based brokerage. Until we have our own setup this is where we strongly urge our clients to open accounts. For Sparen FX clients we will be following up on our most recent email very soon. As you can see from this update we have had quite a few tasks on our hands, but we have not lost track of this and will be following up shortly.

SUMMARY

We are quite happy with the outcome of our new trade protocol and our new model and believe it will serve us all well going forward. We are in the meantime going to be busy working on our new clearing endeavor and will keep all parties informed as we go. Being managed traders for so long we feel no one will be in a better position to do this properly than ourselves.  In the meantime we are looking to keep a watchful eye on the markets.  It has been a tough go the past few months but we never give up and never stop trying to improve and that is our commitment to our clients and ourselves.

As always we will do our best to communicate 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 (http://cayoflow.blogspot.com/) 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.

Warm Regards,

The CayoFlow Team