Dear Investor,
We hope that this message finds you all well as we enter into the month of June. Our apologies for the delayed update as we have been extremely busy with things and always aim to get our updates out by NFP each month. This report is mixed with some good, some bad, and some important news. The bad news first is that we had a negative overall average month in May. One of our poorest months to date and this was very frustrating for us. Even though one of our systems was positive, the other 3 were not in-turn bringing the monthly average into the negative. The good news is we are finally getting a reduction in our volume commission which we are gladly passing along to our clients. Many have written about this to us, and we are ready for implementation July 1. That with a shift to quarterly compounding cycles should all translate into more cash into our investor’s pockets. The important news is on some big changes to our systems this month (including a merger of two – Vega and Chrome. Chrome is now Vega – but with a few Chrome strategies in it). More details below. We have some huge updates to PFX as well. We have been doing a pile of research for the past 4 weeks, and we believe that there is a very significant fundamental “shift” taking place in the markets as a whole which we explain below and how we plan to contend with it which many of you may find interesting.
The markets in May were filled with terrible nervousness regarding the looming euro-zone debt crisis which was not soothed at all by a still unsettled draft plan "troika". For those not following this, there will be a vote that takes place at the end of June to see if various legislation passes, or if Greece will basically crash and burn. If Greece does not get the new austerity measures passed, Greece will default, and the financial and economic consequences of this are dire and will have an enormous effect across the world in the financial markets and banking system. So logically we are paying very close attention to this. Then (of course at the same time) we saw that the US governments credit status (debt) was both actually downgraded and threatened to be further downgraded by several rating agencies (Moody's Investors Service and Standard & Poor's Fitch Ratings) because of their own debt ceiling and probability of default – also having a large impact on market sentiment. What this boils down to is that tensions are very HIGH and things don’t look pretty on both sides of the pond right now. We usually do not get caught up in the fundamentals too much, but when it impacts the markets like this we do. We are keeping a close eye on the situation and the markets which are still quite volatile and should remain as such until the end of this month or beyond.
As always, 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. 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 May are as follows…
SYSTEM | INOVA | OFM | |
Precision FX | -9.25% | -12.39% | |
Chrome FX | -6.80% | -9.77% | |
McLaren FX | -12.06% | -14.02% | |
Vega FX | 4.40% | n/a | |
April Average | -5.93% | -12.06% |
NOTE: The overall difference in performance this month between brokers was due to a slight increased risk measure on floating equity which in-turn magnified gains and losses. This has since been addressed, but is the reason why one broker had better returns than the other.
* 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 these 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 1st 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 below and on the following page: http://cayoflow.com/performance.html for a further detailed breakdown.
MONTH-END TRADING RECAP
MONTH | PRECISION | CHROME | MCLAREN | VEGA | AVERAGE | |
Dec-08 | 32.30% | 72.32% | 52.31% | |||
Jan-09 | 18.70% | -4.19% | 7.26% | |||
Feb-09 | 27.50% | 160.30% | 93.90% | |||
Mar-09 | 29.50% | 21.79% | 25.65% | |||
Apr-09 | -34.40% | 61.33% | 13.47% | |||
May-09 | 53.30% | 33.53% | 9.43% | 32.09% | ||
Jun-09 | 23.60% | 25.77% | 30.46% | 26.61% | ||
Jul-09 | 10.10% | 20.69% | 28.02% | 19.60% | ||
Aug-09 | 26.92% | 10.77% | 26.94% | 21.54% | ||
Sep-09 | -0.32% | 5.44% | 7.83% | 4.32% | ||
Oct-09 | -4.26% | 20.36% | 11.94% | 9.35% | ||
Nov-09 | 10.76% | -20.98% | 29.39% | 35.58% | 13.69% | |
Dec-09 | 9.37% | 15.94% | 7.78% | 11.14% | 11.06% | |
Jan-10 | 33.63% | 27.91% | 4.30% | 14.63% | 20.12% | |
Feb-10 | 15.31% | 14.93% | 2.33% | 22.48% | 13.76% | |
Mar-10 | 15.43% | -5.08% | 6.75% | 13.57% | 7.67% | |
Apr-10 | -8.11% | -9.43% | 2.99% | 1.34% | -3.30% | |
May-10 | 0.70% | -7.66% | 21.07% | 6.52% | 5.16% | |
Jun-10 | 20.86% | 10.56% | 9.68% | 12.75% | 13.46% | |
Jul-10 | 10.80% | 14.57% | 0.15% | 4.29% | 7.45% | |
Aug-10 | 5.46% | 2.34% | 7.35% | 3.34% | 4.62% | |
Sep-10 | 14.91% | 6.13% | 1.37% | 0.82% | 5.81% | |
Oct-10 | 10.36% | 0.02% | 28.55% | 9.60% | 12.13% | |
Nov-10 | 0.05% | 5.60% | -0.35% | 19.62% | 6.23% | |
Dec-10 | 10.46% | -8.04% | 0.20% | 5.77% | 2.10% | |
Jan-11 | -3.16% | -3.89% | -0.17% | 12.39% | 1.29% | |
Feb-11 | 13.28% | 8.79% | 0.97% | -9.92% | 3.28% | |
Mar-11 | -4.95% | 12.67% | 10.05% | 0.23% | 4.50% | |
Apr-11 | 3.41% | -15.89% | 13.39% | 0.47% | 0.34% | |
May-11 | -9.25% | -6.80% | -12.06% | 4.40% | -5.93% | |
TOTAL COMP'D RETURN: | 1554.09% | 3074.36% | 841.57% | 368.97% | 3906.44% | |
MONTHLY AVERAGE: | 11.06% | 15.66% | 9.93% | 8.90% | 14.32% | |
MONTH-END TRADING RECAP
1. Precision FX – PFX just as of June 3rd and June 10th has had two of its biggest overhauls and makeovers in the past two years. Most of this had to do with the scalping aspects of the system. For most of this year scalping has been getting tougher and tougher to do. We have finished weeks of analysis and testing and have made some very significant adjustments to the scalping components of PFX. Most of which we are very excited about. In general the Asian session (prime scalping session) has been a total mess as of lately. Aside from market sentiment, there are simply a whole lot more people coming in and doing what we have been doing successfully for the past 3 years. Our research tells us that there has been a huge influx in high frequency trading, and algo trading during these normally “quite times” when scalping conditions have primarily been great. Last year you could usually see hours of currency ranges in the Asian session with low volatility and very little trend formation. Lately we are lucky to see one hour in these time periods. While the increased high-frequency trading has done some good by amplifying liquidity and lowered spreads, it has also most certainly increased volatility as well.
We have implanted some new features in response to this. Namely being 1. Expanding trade hours - we are now trading outside our regular Asian window. Basically if conditions are good, we will scalp. If not, we will sit out, (no matter what session). We will not limit this to a particular time frame as much anymore (although the Asian session still overall is best). But if we find good opportunities outside of the Asian session, we will capitalize on them. 2. Increased SL and TP targets - we won’t get stopped out near as easy when sudden spikes quickly become worsened as automatic stop orders flood the market. We will of course have to contend with the occasional large looser (common to scalping), but they should be fewer and further between. Our profit targets are higher now as well. 3. Stricter trade entry requirements (filter and indicator based). This means our trade entries are a little different. We expect a little less trades, but the ones that do pass the test should have a higher rate of success. Given the overall state of the market we are still proceeding with relatively low risk, but we anticipating seeing a very big improvement on the overall success of PFX in the short term and after this Euro stuff and dollar stuff settle or come to some form of resolution this month, we will increase our risk slightly and systematically. We are always ensuring that this system continues to morph and adapt with the market.
2. Chrome FX – CFX struggled this month as well for the same reasons that PFX did. Much of the drawdown occurred around the scalping, and the scalping aspect of Chrome has even tighter stops than PFX and due to this last month we witnessed quite a few more SLs than normal. Chrome has been a tug-o-war for most of this year. It is diversified, and it has some really great and consistent strategies, but also some less great ones which often eat up most of the good strategies gains. We have decided to remove much of the “filler” in this system, and strip out only the best strategies, and move these over to Vega FX to further diversify it a little more. The Vega developers openly welcomed this. As of this update we are ditching the “Chrome” product, and merging it into the VegaFX program, with the best of the Chrome strategies mixed with the best of the Vega strategies. This is in effect as of June 10th. For clients in Chrome, this is going to be seamless, and you will see the newer strategies take place asap. While this only gives us 3 systems now, we believe that this is enough for proper diversification and we hope to see 3 solid systems as apposed to a potential 4 mediocre ones.
3. Vega FX – VFX as indicated above has just had a Chrome sub-strategy added to it, to assist in its overall basket of diversified strategies. We had a very short term sub-strategy added during the middle of last month, but it required a different feed to work properly so it was ceased until the feed becomes available upon more testing (it was very successful when live). It’s now trading very well with its medium and longer-term strategies. It was our only positive system in May, and is off to a great start this month as well. We feel that this is going to be a very strong product with the additional sub-strategy from Chrome now, and has potential to be our top long-term performer. Vega is now officially trading at OFM brokerage now as well. We will have a complete write up this month for the system with all its details as we have are overdue and this has been requested by many of our perspective investors.
4. McLaren FX – MFX our longer term swing system had a really tough month this month as well, clearly verifying the randomness in the markets as it is highly non-correlated to our other systems. This system uses classical chart patterns for signal generation and risk control which were arbitrary this month due to much of the volatility experienced and a change in short term price behavior. This system trades many pairs, even the exotics and even finding good trades this month was a challenge when usually it can always find a pullback in the markets somewhere. This system has just come off a good run for a few months, and will get back into its course of profit after some of the volatility settles. In the meantime a very big update is in the works for this system as well, much along the lines of what happened to PFX - a complete overhaul, revision, and possible diversification are in store for this strategy, which we believe will bring many good things to it.
INFORMATION AND NEW DEVELOPMENTS
1. Markets (Very interesting information here – especially for traders) – While revising some of our strategies these past few weeks, we have been doing a lot of R&D on the forex markets as a whole, and speaking to some large players in the industry (i.e., hedge funds, prime brokers, liquidity providers and some interesting market research groups etc…) and have been finding a lot out about the overall market changes and dynamics. Most are all coming to the same conclusion that there has been a significant impact on price behavior in the short- and intermediate-term time frames in the forex markets. Things are changing rapidly, and may likely never revert back to the way they were in the past. We have been a living testament to this in the past. 3 years ago we could scalp the eurgbp and eurchf for 5-6 hours per day without a hitch – it was beautiful! Then last year we had to revise this strategy as this was no longer possible. We changed time frames, added more pairs, revised the full scalping parameters, and had another great run. Once again we are noticing its time for various changes and have just recently implemented some major changes which should bring us some good fortune. For how long we are not sure, but one thing is for certain and that is not only are the markets changing more drastically, but the changes are also more often. So this certainly won’t be our last revision of strategies.
Much of our research shows that these changes are due to two primary factors. The first being huge volatility from the post-financial crisis uncertainty, but also from the pre-financial crisis looming (euro and usd). Tensions are extremely high in North America and Europe especially as indicated above, but also Asia. Overall volatility is at elevated levels right now. The second being the massive influx of high frequency trading and algorithmic trading coming into the forex markets. Here are the facts: “High-frequency trading accounted for roughly 30% of all foreign-exchange flows, as of 2010, compared with 13% in 2004, according to Boston-based consulting firm Aite Group. (By contrast, 66% of global stocks trading are high frequency).” According to Aite Group, it will jump to 42% by the end of 2011 and to 60% in 2012 in the fx markets. “About 85% of the currency market’s growth in volume from 2007 to 2010 came from algorithmic and high frequency trading entering the market. According to a research paper on the topic, the massive influx of algorithmic trading has already caused a huge decline in the real power of technical analysis.
Some of the other side effects when these shifts in market sentiment occur are 1. An increase in the frequency of premature or false pattern breakouts. This is especially true on shorter time frames (much less reliable now than they were in the past). 2. It is almost a certainty that shorter-term patterns morph into a new slightly longer-term patterns which then morph again and again. Nearly each morph produces a losing trade if a position is held long enough. 3. Even in those cases when patterns work, the breakouts are much sloppier (usually require several attempts). 4. Intra-day noise has increased tremendously, more than ever before. 5. Nighttime price behavior is extremely unreliable.
We thought many of our readers may find this interesting as we sure do. While this may sound a little disheartening, keep in mind that with any change, come both challenge, but also opportunity. There is starting to be a large debate whether it will still even be possible for the average retail traders to turn a profit. We believe it will, but it will certainly get more challenging. Adaptability will be the name of the game more than ever. Those who embrace this in our opinion will go the distance. Those who do not will make some fast money then crash and burn in our view.
2. Brokers – Surprisingly we do not have much of a rant on brokers this month. Typically a large portion of our losses are due to brokers when we have a down month, but that wasn’t much of the case this month (there was a little, but most was regular justifiable trading losses which will always happen). Inovatrade should be getting new deposit banks for July which many will like. OFM was trading with a slightly higher risk profile this past month. This is due to the fact that our money management modules base trade sizes on floating equity. We were required to keep an “overflow deposit” at OFM but this actually shows up on our equity (not balance) which is where most of our trade sizes are calculated from (available free margin) so this caused a slightly increased risk profile last month hence exaggerating gains and losses compared to inovatrade but has been adjusted for recently. We would like to point out that while OFM is mainly for non-USA investors, we can work with select ECP clients (i.e., accredited/sophisticated investors) from the USA there. On the SparenFX front, many of you have received an email update this past week detailing the progress. Although we have been told that our MAMs have not yet been entered into the exit process yet, we have reports of a few clients having their exits completed. We are tracking separately each and every one of our clients to ensure that no one gets missed. We have all but two clients who have not submitted their exit forms yet, but thank you to everyone else who has submitted them in a timely fashion. We anticipate that by the next update this will be well underway or even finished. As we receive more information we will of course update our investors as it comes along. As of right now we have stopped trading all of our MAMs there until the exit transpires.
3. Monthly to Quarterly Performance Fee Periods – This will officially come into effect on July 1st. This will work out to be better especially for all our long term clients as you will now have a 3 month compounding window for funds to grow and compound without them getting chopped down each month by the monthly performance fee. But for people who do need to make withdrawals between the quarterly periods, we will have accounting at our brokers deduct the required performance fees from the account before the withdrawal is processed. We hope that this results in a little more dough in our client’s pockets over time and are happy to make the change.
4. Transaction Commission Reduction – We are reaching a volume threshold at both of our brokers where we will be entitled to a reduction in transactional fees. Unless things change this should go into effect on July 1st as well. We are unsure the exact amount at this point, but we go to the negotiating table this month. We are doing quite a few things on the private side at both of our brokers so we will of course need to factor everything in, but we believe it will be a decent reduction. Both of these brokers are much more flexible and business savvy than Sparen was. This is good news as it should also translate into a little more dough into our investor’s pockets each month, and combined with quarterly compounding periods should have a decent impact on the bottom line in terms of net performance.
5. Cayo Live – May has been one of the very few months where we have consistently seen manual discretionary traders out-perform the automated systematic trading systems. This is not normally the case, but we do see the benefit in a completely managed manually traded account (no computer programs). Due to this we are toying with the idea of bringing a ”cayo live” trader to the table to manage an account for us and any clients who may be interested. We know and work closely with some very good traders, and it would be just a matter of us deciding on who would best fit in terms of trading style and possible partnerships. We will be exploring this option closely and it could be a new development of ours. While our whole roots stem from automated trading, we are always open to various different forms of diversification and this could be one to look for in the not so distant future.
SUMMARY AND GOALS
We know that as traders we cannot always blame the markets or high volume trading operations or algo trading or brokers or external factors etc... for any negative performance we may encounter. Rather, evolutionary changes in price behavior must eventually be addressed by corresponding modifications in a trading plan or system and development groups need to take full responsibility. Which is exactly what we are doing. As markets shift, so will we. We never like it when we have an average negative month like we did in May, but they surely will happen from time to time. We always stress to our clients that this is a long-term investment, but only for those firms and investors who are committed to performing long term (and thinking as such) and not chasing the holy grail. The short term investors or traders looking for the fast “in and out” approach to wealth will never really match up properly with the longer term approach group. More often than not the quick buck groups do not have a happy ending. Understanding this and more importantly having realistic expectations in terms of risk, drawdowns, long-term profit targets, fair trading conditions, and market adaptability are our primary focuses and goals at present. This will be our 3rd consecutive full year in a row of managing client funds in the fx marketplace (one of the longest we know of) and we want all of our investors to understand that we are here for the long haul. This has not been without its challenges. We are usually faced with one challenge after another to some degree. This year so far has been chalk full of challenges on the brokerage front, and a bit of a back and forth story in terms of performance. But when we hit difficult periods such as in May, we do everything we can to identify the underlying causes and make any required changes to get back on top again. Our primary focus is on longevity above all us, and the steady and gradual growth of our equity has been best achieved through proper non-correlated diversification and consistent adaptability when warranted.
We are looking forward to heading into a profitable month ahead of us. 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 (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
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