Trading Strategy of the Week: Charise Francesca
Any results mentioned or shown are based on simulated or hypothetical performance that have certain limitations. See bottom of this post for full disclosure and important warnings. Past results are not necessarily indicative of future results. Most people lose money when trading. These results are based on statistics that were current as of July 19, 2016, when this profile and article were edited.
Here’s our interview with Collective2 Trade Managers Rik Kwan & Charise Francesca talking about their strategy “Charise Francesca.” You can view summary statistics, including hypothetical monthly returns and subscription costs, inside Collective2.
He’s technical. She’s empathetic. He’s country. She’s rock-and-roll. He loves to trade treasury-note futures. She… well, she loves to trade treasury-note futures, too. No wonder they make a great team.
He’s technical. She’s human.
Charise Francesca is a mean-reversion strategy. Sometimes, rarely, it will act as a trend-following strategy. It uses a combination of technical indicators, most of which are commonly available and probably familiar to most traders. Our secret sauce is the exact combination of indicators we use, plus their parameter settings.
Charise Francesca is the name of the strategy, but it’s also the name of my partner. I’m the technical person behind the strategy. Charise is the fundamental analyst. The way we work together is simple: my technical analysis comes up with the trade, and Charise uses fundamental analysis (and common sense) to say yes or no. In short, the strategy is technically disciplined with a discretionary component. Human judgment is required to OK any technical signal. In a sense, our two-person team is yet another “indicator” on top of the technical indicators.
We think that the “common sense” component of the strategy — the human vetting of trades — is an important part of the strategy, maybe the most important part. That, and having patience, which is the scarcest commodity on Wall Street, as Richard Russell once said.
Our strategy was developed over a period of many years. Both of us have had our share of disappointments, margin calls, sleepless nights, and moments when we wanted to throw up. We have made all the mistakes that traders can make. You know the old Ed Seykota quote? — ‘There are old traders, and there are bold traders, but there are very few old, bold traders.’ We’re living proof of that.
Avoiding correlation with the stock market
We trade leveraged ETFs, with some futures contracts thrown in on occasion. The reason for this mix of products is that we are always scared of bear markets. We are always nervous! So we like to nibble at a trade using a leveraged ETF before we fully commit. It’s like being at a party and staring at the exit, eating small bites of hors d’oeuvres before you flee. We try never to swing for the fences. Instead we take a long-term view, that not every trade needs to be a huge winner.
Overall, our goal is to have a system that is not highly correlated to the S&P 500. Of course the performance of our strategy is most important, but, after numerical performance, the most important goal is correlation (or lack of it, more precisely). Why? Because it is nice to have a strategy that doesn’t move in tandem with the S&P 500. It is valuable in and of itself to make sure that a portion of your portfolio is not aligned with the market.
This policy is what allows us to be an ‘alternative asset,’ in the truest sense of the term.
I have an IT security background. I graduated from University of Southern California. I started as a journalism major, then went on to business school. I attended the School of Accounting at USC for a while, but then switched to regular business school, where I studied Information and Operations Management (IOM). IOM is like IT, but with a business emphasis.
When I got out of college, I worked for a Big-Four consulting firm, installing and implementing enterprise software. I criss-crossed the country for five years, then spent a year working in Europe. All that travel was exhausting, but it gave me life experiences and made me the person I am today. After traveling, I settled down and worked at a corporation for 13 years. I still work there. I ended up in the IT Security, Risk, and Compliance Department. To summarize my entire job in one word: I am paid to be paranoid.
We are always scared of bear markets. We are always nervous! So we like to nibble at a trade using a leveraged ETF before we fully commit. It’s like being at a party and staring at the exit, eating small bites of hors d’oeuvres before you flee. ”
What he like about Collective2
We love the transparency and features of Collective2’s web site, and its integrity as an organization. We love the fact that C2 is a technical website, and not a “dumbed down” mainstream consumer portal. Everything — from The Grid, to writing queries using C2 Explorer — is designed for trading professionals.
We love Collective2’s AutoTrade technology — the way you can scale your trading bigger or smaller, the way you can manage positions manually if you want, and can transparently see what the fills are. We love how hands-on and technical the Collective2 management team is — the fact that Matthew Klein knows how to code. We can’t imagine a traditional brokerage firm stopping to consider (or even understand) some of the forum requests for new features, the way C2 does.
Advice for people starting out at Collective2
There are going to be times when a strategy has a drawdown, and you need to do a gut check and decide if you have faith to stick with it. We recommend you do that analysis before the drawdown happens — maybe even before you subscribe to a strategy — so that you are ready when the tough times come, and can react thoughtfully and analytically.
So, our advice is: when you subscribe to a strategy, try to understand how the strategy trades, and try to get a feel for its style. Pull up a chart and look at the dates and times that the strategy has made trades in the past. Try to understand what it is doing. That way, if you have a feel for how things are supposed to work, it may help you ride through the next drawdown. Ultimately, it is a question of faith.
The other point we want to make is that it is rare for strategies to do well during market sell-offs or financial calamities. Why? Because during those times, the correlation of assets skyrockets as participants need to sell in order to meet margin calls or increase liquidity. For example, if you look at 2008, gold was actually trending down most of that year (not really a safe haven). So again, observe how the strategies you subscribe to react during times of market stress.
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.