Trading Strategy of the Week: Average Expectancy250k
This week we spoke to Collective2 Trade Leader David Zaitzeff about his flagship C2 trading strategy average expectancy250k. He also manages the strategies average expectancy27k and average expectancy26.
David Zaitzeff tries to benefit from statistical anomalies.
Tell me about your strategy. Is it algorithmic, or discretionary?
“It’s algorithmic, generally speaking. I say ‘generally speaking’ because it’s not 100% computer-driven. Sure, it would be nice to have a computer that does all the work, but I feel strongly that some human oversight is required when you’re dealing with money.
Trading inevitably involves discretion. Let’s say the market may moves in a way that prevents you from getting in at your desired price. Do you simply leave the limit order to enter in place or do you use a market order to enter? Do you adjust your limit order?
There is no single answer that covers every possible situation. I like to use my personal judgment in these cases.
And, look, the truth is that, if you are in the right direction for most of your trades, you can make money even if some of your entry decisions are goofs by 1 or 2 S&P 500 Emini futures (ES) points. It’s helpful to keep that in mind: it lowers the pressure and allows you to make better decisions.”
Tell me about your trading.
“I hope to trade 3-10 times a month. I’m exclusively trading S&P E-mini futures at this time, although I think my approach will work on any of the stock market indices.”
Look at the ‘Trump effect.’ On the night of Trump’s election, every talking head on TV predicted that the stock market would decline. Yet, the market has moved upward, and very violently, since then.
Why the S&P Index?
“The behavior of the S&P is well-studied. Thousands of ‘strategies’ and ‘systems’ have been created for the S&P. The S&P is more studied than sugar and wheat, and also is less subject to one single adverse event such as unpredictable weather or unexpected reports of extra sugar being found in warehouses. The S&P is influenced by hundreds of factors, including interest rates, oil prices, put-call volumes, geopolitical crises, etc. — so many inputs means that no single surprise is likely to dominate.”
But over the years we’ve witnessed the S&P move violently, both down and up…
“Of course. I’m not saying it doesn’t move. Thank god that it does. That’s what gives me a job. Long-side trades are at risk from catastrophic possibilities such as pestilence, terrorist attack, presidential elections, political scandal, banking and hedge fund failures, or reactions to events such as Brexit. And, to your point, there’s risk to short positions, too. Look at the ‘Trump effect.’ On the night of Trump’s election, every talking head on TV Predicted that the stock market was in for a period of long, slow, decline. Yet, the market has moved upward, and very violently, since then.
So the use of stop-losses is something of an art. For me, stops protecting long positions are chosen in such a way that they’re hit only rarely, if at all. A stop loss set at anything less than 25/30/35 ES points away from entry degrades a strategy’s performance. The market is fully able, once every few months, to fall by 25 points on a long signal and then turn around return to entry and go higher.”
This chart is based on simulated or hypothetical performance that have certain limitations.
See bottom of this post for full disclosure and important warnings.
From what I understand, your strategy is based on statistical studies of price movements?
“I have been experimenting and adjusting my strategy for about seven years. I like finding predictable relationships. For example, Fed announcement days and unemployment report days have a fairly strong up tendency statistically. Anyone could find that out by buying some of the simple studies on those days. There are many of these sort of statistical anomalies: “turn of the month effect”, the “Fed day effect” and the unemployment report effect are basic things that anyone can discover with some elbow grease and an excel spreadsheet. There are some other days of the month that tend, statistically, to move downward; and there is occasional fluky behavior on options-expiration day one should know.” [Editor’s note: Of course there is no guarantee that any observable statistical pattern will continue to exist, or will be exploitable for profit.]
Do you have any advice for people who use Collective2 to subscribe to strategies?
“If you have more than $100K and can do so, choose several strategies, so that your portfolio will be insulated if any one strategy turns bad.
And most important: communicate with the strategy developer to learn his philosophy. Use common sense and turn on your B.S. Meter. For example, I would be suspicious of a strategy where the Trade Leader says his signals are based on the phases of the moons of Jupiter, or voodoo — or are based on something really simple like moving averages.”
Past results are not necessarily indicative of future results.
These results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown.
In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program, which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.
Material assumptions and methods used when calculating results
The following are material assumptions used when calculating any hypothetical monthly results that appear on our web site.
- Profits are reinvested. We assume profits (when there are profits) are reinvested in the trading strategy.
- Starting investment size. For any trading strategy on our site, hypothetical results are based on the assumption that you invested the starting amount shown on the strategy’s performance chart. In some cases, nominal dollar amounts on the equity chart have been re-scaled downward to make current go-forward trading sizes more manageable. In these cases, it may not have been possible to trade the strategy historically at the equity levels shown on the chart, and a higher minimum capital was required in the past.
- All fees are included. When calculating cumulative returns, we try to estimate and include all the fees a typical trader incurs when AutoTrading using AutoTrade technology. This includes the subscription cost of the strategy, plus any per-trade AutoTrade fees, plus estimated broker commissions if any.
- “Max Drawdown” Calculation Method. We calculate the Max Drawdown statistic as follows. Our computer software looks at the equity chart of the system in question and finds the largest percentage amount that the equity chart ever declines from a local “peak” to a subsequent point in time (thus this is formally called “Maximum Peak to Valley Drawdown.”) While this is useful information when evaluating trading systems, you should keep in mind that past performance does not guarantee future results. Therefore, future drawdowns may be larger than the historical maximum drawdowns you see here.
Trading is risky
There is a substantial risk of loss in futures and forex trading. Online trading of stocks and options is extremely risky. Assume you will lose money. Don’t trade with money you cannot afford to lose.