Dear Investor,
Our apologies for the delay in the newsletter. Most of our team has been in Asia since the start of the month to iron out some details on our brokerage initiative. First of all, let us wish you a happy new year, whether if it has been celebrated yet or not (depending where in the world you may live). We hope that many of you had a chance to enjoy the holiday season, and were able to relax and recharge the batteries in good company. We believe that 2012 is set to be a very interesting year on many fronts!
2011 however, has without a doubt been the toughest year we have had in our lifespan of managed FX accounts (now over 4 years – which makes us one of the longest running groups still around). This has been a very difficult time for many people (us included) with huge stresses impacting our day to day lives and families and relationships. There has been to much activity impacting the markets alone to even list, but in a nutshell we have witnessed… new 20 year highs and lows on many of the regular Forex pairs, a complete deterioration of technical’s in the markets, coordinated interventions by various governments to alter their currency pricing, panic rational by institutional investors in the market place, major bankruptcies, defaults, frauds and failures including two unregulated brokerages which directly impacted us, major natural disasters from earthquakes to tsunamis causing major socio-economic and environmental problems from riots and protests to nuclear meltdowns and oil spills.. you name it... this was a year many people will never forget (and are glad to say goodbye to).
There are a growing number of people who believe that 2012 is a special year for various reasons. Some believe we may be facing a catastrophic event which will have a huge effect on our way of life. Others believe that the earth is screaming back to us, that it has had enough (reached its tipping point) in terms of pollution and destruction, and its now looking to heal or reset itself. Other groups believe that there is a general shift in consciousness taking place from all of the people around the world, looking for change in what they believe is a broken and corrupt system we are living in. This only scratches the surface in terms of the different theories people have, but one thing most people agree to is that this is a year where many will experience drastic changes in some form. Personally we do not believe in much of the doomsday scenarios, but we believe that this will be a year of positive change, perseverance, restructuring, and new beginnings for many people.
Despite the problems in 2011 we are still kicking around, we have not given up, and we have faced the challenges. Navigating through a year like this has been unprecedented for us and we have learned a tremendous amount of information from it on the trading front (which we detail below), the financial markets in general, and on personal notes as well. While painful at times, these mistakes were not without gain, as have learned so much from it, we feel it has really helped us to grow stronger, and we have many good and interesting ideas this year we would like to implement and we hope to be able to impact many others in a positive way this year.
Our apologies for the length of this letter, but we would like to discuss a few important topics including new developments and goals of ours. Before addressing this, below are our results for December. Overall we are very happy with how the systems performed (mainly McLaren) and here are our official results for December 2011:
| SYSTEM | RETURN |
| Precision FX | 3.62% |
| McLaren FX | 18.89% |
| Vega FX | -1.64% |
| Average | 6.96% |
Our yearly returns and stats will be updated in our audits section before the month is out, which is rather complex seeing as how we have a combined annualized return across multiple brokers, two of which are no longer available, so it will be a “stitch work” of annual returns across 3 brokers.
* 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 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 will also be updated on the following link: http://cayoflow.com/performance.html
2011 MISTAKES and RESOLUTIONS
We admit to not being perfect. The markets and events in general this year literally forced us into many tough predicaments trying to survive through all of the craziness. We have thoroughly analyzed and looked deep and hard at many of the problems we encountered this year, and worked closely with other professionals in the industry to truly identify these, and learn from them, and implement winning strategies going forward. Here are a few of the key problems we encountered, and what we have learned and implemented to prevent such problems from arising in the future. We encourage other investors and traders to do the same procedure of hammering these out on paper, as it often takes such a practise to truly identify underlying root problems.
1. Mistake: Adjusting our risk in reaction to market events.
- This is a classic mistake that is hard for many to really evade, and sometimes it is difficult not to justify this one. When a really tough month occurs (for whatever reason) it sends jitters to traders, in particular money managers who often hear feedback from their clients about the performance. In response to this, many believe the best approach is to adjust risk (lower it) because the market is “unstable”, and then increase it when the market has consolidated.
Resolution: The problem in the above scenario is that it’s difficult to impossible to predict when market conditions improve, and they may never really go back to how you would like it to be to work best with your strategy. But the biggest problem with this decreasing and increasing risk is that you often end up reducing risk during the best times when you could recover the losses faster. So you end up actually in worse shape, by being more aggressive when losses occur, and less aggressive during the recoup period. The absolute best strategy here in our view is to set your risk to a comfort level you fully understand, and trust your system to run through the good and the bad. Loss is part of trading, and cannot be avoided, but the ability to recover and recoup losses is very important and should not be hindered in any way, despite the common urge to “adjust” risk after poorer periods of performance. These adjustments are better done on a micro level (i.e., adjusting during news announcements, or major economic events/interventions), but not for extended periods of time. It often takes understanding this mistake for many traders to realise that they were trading to aggressive in the 1st place.
- This is a classic mistake that is hard for many to really evade, and sometimes it is difficult not to justify this one. When a really tough month occurs (for whatever reason) it sends jitters to traders, in particular money managers who often hear feedback from their clients about the performance. In response to this, many believe the best approach is to adjust risk (lower it) because the market is “unstable”, and then increase it when the market has consolidated.
Resolution: The problem in the above scenario is that it’s difficult to impossible to predict when market conditions improve, and they may never really go back to how you would like it to be to work best with your strategy. But the biggest problem with this decreasing and increasing risk is that you often end up reducing risk during the best times when you could recover the losses faster. So you end up actually in worse shape, by being more aggressive when losses occur, and less aggressive during the recoup period. The absolute best strategy here in our view is to set your risk to a comfort level you fully understand, and trust your system to run through the good and the bad. Loss is part of trading, and cannot be avoided, but the ability to recover and recoup losses is very important and should not be hindered in any way, despite the common urge to “adjust” risk after poorer periods of performance. These adjustments are better done on a micro level (i.e., adjusting during news announcements, or major economic events/interventions), but not for extended periods of time. It often takes understanding this mistake for many traders to realise that they were trading to aggressive in the 1st place.
2. Mistake: Tweaking strategies in reaction to market events.
- This is also a classic mistake that is hard for many to avoid. Especially for auto traders such as our team who have well over 30 strategies to pick and chose from. Much like the above mistake, when a really tough month occurs (for whatever reason) it sends jitters to traders, and may spark the urge to change up and switch to more profitable strategies, not currently being used live, but which are displaying better performance at the current time.
Resolution: This is a pretty common human nature reaction. The problem in the above scenario is that ESPECIALLY in a year like 2011, most strategies cycle through winning and losing periods, and sometimes more frequently than normal, such as this year. Much like the issue above, when you make a change in strategy based on short term performance, you often switch it to what appears to be a better strategy, only to find that AFTER your switch, the better performing strategy starts losing and the old losing one that you removed starts performing exceptionally well! This is the classic case of sitting in one lane of traffic, moving to the faster one, only to have it stall, and your old lane starts moving along. This is an opening scene from a funny movie called “Office Space”. What you end up with in this scenario is jumping from one poor performing strategy to another, and missing out on the winning aspects of them, hindering overall performance. You need to rely and be confident on the data and all meaningful metrics for the basket of strategies you are using at the given time. Crunching the numbers, back testing the models, and forwarding testing provide the data needed to rely on the strategies, and you need to let them run through the natural ebb and flow of the markets, which often includes loosing periods. We have made a FIRM commitment to running strong analysis on our strategies and not making any tweaks until the end of each quarter.
- This is also a classic mistake that is hard for many to avoid. Especially for auto traders such as our team who have well over 30 strategies to pick and chose from. Much like the above mistake, when a really tough month occurs (for whatever reason) it sends jitters to traders, and may spark the urge to change up and switch to more profitable strategies, not currently being used live, but which are displaying better performance at the current time.
Resolution: This is a pretty common human nature reaction. The problem in the above scenario is that ESPECIALLY in a year like 2011, most strategies cycle through winning and losing periods, and sometimes more frequently than normal, such as this year. Much like the issue above, when you make a change in strategy based on short term performance, you often switch it to what appears to be a better strategy, only to find that AFTER your switch, the better performing strategy starts losing and the old losing one that you removed starts performing exceptionally well! This is the classic case of sitting in one lane of traffic, moving to the faster one, only to have it stall, and your old lane starts moving along. This is an opening scene from a funny movie called “Office Space”. What you end up with in this scenario is jumping from one poor performing strategy to another, and missing out on the winning aspects of them, hindering overall performance. You need to rely and be confident on the data and all meaningful metrics for the basket of strategies you are using at the given time. Crunching the numbers, back testing the models, and forwarding testing provide the data needed to rely on the strategies, and you need to let them run through the natural ebb and flow of the markets, which often includes loosing periods. We have made a FIRM commitment to running strong analysis on our strategies and not making any tweaks until the end of each quarter.
3. Mistake: Risk and Diversification – finding the right amount of both
- We have been down this road a bit this year. Over-diversifying your portfolio and strategies can cause many problems for you, especially when the risk is not properly balanced, and when there are periods of dreadful market sentiment and a deterioration of technical’s affecting literally ALL strategies.
Resolution: We are all aware of the importance of diversification, especially us. We diversify each of our systems with multiple strategies and run 3 systems (PFX, MFX, and VFX) in parallel to one another for further diversification. However, diversifying too much, can often dilute performance (i.e., you can never gain any ground), or it can exaggerate doomsday scenarios when they strike, effecting your strategy much worse. We have really limited our diversification on each system to a few core non-correlating strategies which compliment each other nicely. The goal is to have them perform well in most market conditions, yet not cancel each other out to often. But not being so widely diversified that its impossible to gain traction, or that huge losses can occur when all systems perform poorly at the same time (and they often do, more than ever nowadays). We have made a firm commitment to not diversify one particular system with more than 4 sub-strategies, and to ensure we are comfortable with all worst case scenarios (i.e., if all strategies were to be open at once, and all to hit the max SLs).
- We have been down this road a bit this year. Over-diversifying your portfolio and strategies can cause many problems for you, especially when the risk is not properly balanced, and when there are periods of dreadful market sentiment and a deterioration of technical’s affecting literally ALL strategies.
Resolution: We are all aware of the importance of diversification, especially us. We diversify each of our systems with multiple strategies and run 3 systems (PFX, MFX, and VFX) in parallel to one another for further diversification. However, diversifying too much, can often dilute performance (i.e., you can never gain any ground), or it can exaggerate doomsday scenarios when they strike, effecting your strategy much worse. We have really limited our diversification on each system to a few core non-correlating strategies which compliment each other nicely. The goal is to have them perform well in most market conditions, yet not cancel each other out to often. But not being so widely diversified that its impossible to gain traction, or that huge losses can occur when all systems perform poorly at the same time (and they often do, more than ever nowadays). We have made a firm commitment to not diversify one particular system with more than 4 sub-strategies, and to ensure we are comfortable with all worst case scenarios (i.e., if all strategies were to be open at once, and all to hit the max SLs).
4. Mistake: Working with lesser known or unregulated brokers – no matter how appealing.
- This mistake has had a huge impact on us and many investors this year. To our complete shock and dismay and total disappointment, we have had two brokers bite the dust this year. One that we had traded at personally for over 5 years. We believe that there are many excellent smaller or private brokers out there, and there is no guarantee that any brokerage will not run into problems, but with a global financial state like what we have seen in 2011 it is more easy and common for problems to arise, and often certain firms can be affected more than others.
Resolution: In our business, brokers have a huge, often tremendous impact on our systems ability to perform. Certain brokers can provide ideal conditions for various strategies (in particular automated strategies) to execute significantly better than others. Most are even outright crooks, including some of the biggest most heavily regulated ones. But in the end this does not matter if the brokerage has a significantly higher chance to go under. There are certain jurisdictions, regulations, and signs that make this more apparent. We have made a firm commitment to work with only highly regulated brokerages, ECN model brokerages, well capitalized brokerages, and brokerages in reputable financial jurisdictions, no matter how less attractive their trading infrastructure may be compared to other brokers not falling into this model. We have also made a firm commitment to take the trading environment (i.e., brokerage) into our own hands and control, which is something very exciting for us, and that we have been working diligently on since July of last year. This greatly increases our chances of success, and ensures we rely much less on 3rd party brokerages making us more independent and sustainable for the long-term.
- This mistake has had a huge impact on us and many investors this year. To our complete shock and dismay and total disappointment, we have had two brokers bite the dust this year. One that we had traded at personally for over 5 years. We believe that there are many excellent smaller or private brokers out there, and there is no guarantee that any brokerage will not run into problems, but with a global financial state like what we have seen in 2011 it is more easy and common for problems to arise, and often certain firms can be affected more than others.
Resolution: In our business, brokers have a huge, often tremendous impact on our systems ability to perform. Certain brokers can provide ideal conditions for various strategies (in particular automated strategies) to execute significantly better than others. Most are even outright crooks, including some of the biggest most heavily regulated ones. But in the end this does not matter if the brokerage has a significantly higher chance to go under. There are certain jurisdictions, regulations, and signs that make this more apparent. We have made a firm commitment to work with only highly regulated brokerages, ECN model brokerages, well capitalized brokerages, and brokerages in reputable financial jurisdictions, no matter how less attractive their trading infrastructure may be compared to other brokers not falling into this model. We have also made a firm commitment to take the trading environment (i.e., brokerage) into our own hands and control, which is something very exciting for us, and that we have been working diligently on since July of last year. This greatly increases our chances of success, and ensures we rely much less on 3rd party brokerages making us more independent and sustainable for the long-term.
GOALS AND TARGETS AND DEVELOPMENTS FOR 2012
We believe that setting goals and forecasting is a very useful and important tool to success., and feel that meandering through life without a plan is a sure fire way to end up no where. We would like to share some of these details with you in as condensed of a format as possible.
Profit Targets of 6% per month – For ALL systems: This is our net monthly profit target for each month in 2012, for each of our systems. This may be a lofty goal, and you may wonder, why this number? Because this is the magic number that when compounded each month, allows us to double accounts in a year. That’s right, if you deposited 100K, and were able to sustain a flat 6% per month and let it compound for 12 months, you would have effectively slightly more than doubled your account. In fact the actual balance after 12 months would be $201,219.65. But you get the picture. Similarly a 3.5% monthly return would allow us to achieve a 50% growth on accounts. Obviously we cannot achieve a fixed return, and we will not stop if we hit this return early in the month, but if we can average this out, we feel we have a good chance of doubling ours and our client accounts in a year. Some people would not be happy with this. Others would be more than thrilled. We did not achieve it in 2011, but we have exceeded it in previous years. We feel that we are positioned well to achieve it in 2012. It surely won’t be without its challenges though. January is already shaping out to be a rather difficult month.
Risk tolerances of -10%: We do not need to explain this one much more. In the past, people were ok to stomach daily drawdowns of -30% if it meant that they could make 50% in a single month. Today, investor logic has changed due to the state of the financial markets, and we are included in that group. We are not going to chase the aggressive returns anymore with our core systems, and instead will focus on slower, safe, growth of our capital. If any of our systems reach a -10% equity drop in a given month, we will cease trading them until the following month. This is not an automated stop, but a discretionary one by our team, but we feel that this threshold is about the most we and our clients want to see for said profit targets.
In House Brokerage: We have touched on this above and in previous newsletters. We will save the details for future newsletters and the official release, but in summary, we have secured access to something very special (currently not available to any retail platform on the planet). No one is pickier about brokerages than we are. If we wanted to open this up widespread, we would have literally zero competition. We have compared our execution, our depth of market and our pricing against literally every broker, and not only is it better, it is waaaaay better. Upwards of 50-70%. We are average 1 pip on GBPJPY to give you an example of how special this. This creates all kinds of new opportunities for us and others in terms of what we can do on the trading front. However, this is not going to be a wide open retail brokerage. It is being built, and bankrolled, primarily for us and our partners, contacts, and associates, and clients. We will work with various external groups subject to review where we see mutual potential and value. This is something we want to protect and not serve to everyone. We expect very, very good things to come from this for us and all of our existing clients. More details to follow next month.
Safe Haven Fund: This is an idea we have been toying with for quite sometime, and have plans to implement it into action this year. As most of us know, the financial markets around us are in a mild state of chaos. What we are intending to do is structure a regulated fund which allows us to provide an easy way to invest in a plethora of safe havens and resources which will hold and store value, naturally hedge, and grow safely over the coming times. This will be a diversified basket of investments which will include a Forex component, cash in a basket of unique currencies, physical precious metal storage, agricultural land, emerging economies, and other non-traditional investments sought to withstand inflation or much worse in terms of what may stand ahead in 2012 and beyond. Much like our trading, we have learned the hard way over time on a much smaller scale the importance of this, what problems to avoid, and how to focus on security and safety above all else. We are working with a great team on this initiative and of course we will be the “Forex arm” of it. This is an exciting project in which we will keep all investors in the loop on as we move along as it will be something that we will be very happy to offer to people.
SUMMARY
We would like to thank you for your time in reading this newsletter, and we hope that it clearly explains some of the challenges we have faced this past year, what we have done in response to them, and some of the projects we are working on going forward to prevent future challenges from arising and better positioning ourselves for success. We are certainly glad to say goodbye to 2011, and we are welcoming 2012 with open arms and are ready for the challenges which will inevitably come our way at times.
We hope that many of you embrace positive change this year. Please ensure you and your family stay safe this year, especially with your finances, and ensure you are positioned well to “stay invested” while being diversified and out of harms way from various potential problems which we may all innately be faced with this year. With any tough periods we see both challenge AND opportunity! Thank you to all our current investors for your trust once again in trading with us and crossing into a new year of possibilities with us!
Cheers!
Cayo Flow Team
No comments:
Post a Comment