How the 'ATS' Systems were Born
This is a True Story
In 1979 I had a small store in Toronto. One of my customers was a commodity broker. She lived next door and every evening on her way home, she would come to my store and tell me how much money I would have made had I bought some gold that day.
In 1980 I saw gold go from $350 an ounce to $800 an ounce. At the time I knew nothing about commodity trading, except that you could make a lot of money or lose a lot of money. And every time the broker came to the store I counted the money I could have made that day. We all know the feeling.
This kept going on for month after month. Towards the end of 1979, I sold my small business and bought a restaurant. I had to wait a couple of months before I took possession of the restaurant, so I decided to go and visit my broker friend and find out what the fuss about gold was all about.
When I got to the broker I still remember the excitement. All these people staring at charts, people making trades. I had all the money from the sale of my business, and it did not take me very long to open a trading account to trade gold. I still remember, I had to put up $20,000 just to trade one contract of gold.
I cannot remember exactly whether I started to trade right away or had to wait a few days, but what I can remember was that the broker got me into gold on a Friday just before the close. Remember this was now January 1980, when gold peaked at $850 an ounce. I made the proverbial blunder, and was one of the last idiots who bought at the top.
Monday morning I was up early to go to the broker and watch the market. Gold started going down and my $20,000 investment down with it. I panicked, made a few trades lost a lot of money, the broker got me into copper, and to make a long story short after a week of hectic trading, and a lot of commissions, I managed to get out with a loss of $5000 only. I still consider myself very lucky at losing just $5000.
However during all this commotion I managed to notice something very important. I saw people "day trading". At the time I did not know what day trading was. I remember all these people trying to make a few bucks, say $300 buying or selling one contract of gold. So I said to myself, big deal, I can make more money running my restaurant, and I thought that all these people were crazy, and I was glad to get out of that office. This was January 1980.
In 1983 I sold the restaurant, and bought our first computer, it was the Commodore VIC20. It did not take me very long to take to computing like a fish takes to water. I bought every book I could find, taught myself programming, bought our second computer, the Commodore 64, and started to write a professional blackjack program to teach players the basic strategy and the card count. The program was called World Class Backjack, and I managed to sell a few hundred copies.
One day while playing with the computer I started to write a program to compound interest rates. For the fun of it, I wanted to find out: if I invested $1000, at say 1% compounded daily, how much money I would end up at the end of one year, 365 days.
Lets face it. How hard can it be to make $50 on $1000. Take retail, it can be done. The trick was how to compound it quickly. Say weekly instead of daily. Therefore theoretically if you could make 5%, and compound it every week for 365 weeks or 7 years, you could make 53 BILLION DOLLARS IN 7 YEARS. INCREDIBLE: enough to fire the imagination and motivate anyone.
When my imagination takes over I never let go. I started to figure out how to put this into practice. You needed something simple. An investment that was very liquid, easily bought and sold, with unlimited potential and most important with fast turn around.
Then it hit me. I remembered all those guys in 1980 trying to make $300 a day trading gold. We are now in 1985 and the margin on gold is only $3000. $300 on $3000 is 10%. But I only wanted to make 5%, or $150, i.e. only $1.50 per ounce. How hard could it be.
It did not take me very long to put enough money together, find a broker and open a trading account. I told the broker exactly what I wanted to do. I wanted to trade gold(because that is the only commodity I knew) and make $100 to $200 a day. The broker understood what I wanted, and advised me that gold was no good these days, because it was not volatile enough, therefore he advised me to trade T-Bonds instead(because they moved).
This time however I was not going to make the same mistake I did in 1980. This time I wanted to study the market first, and formulate some kind of trading plan or strategy. I still did not know anything about technical analysis. I had the broker print for me the daily 5 minute bar charts for bonds for the past year, took the charts home and spent several weeks studying them. At the same time I started going to the broker and talk with the other traders who were also trying to make a few bucks day trading. I saw these people trading everything under the sun: sugar, lumber, coffee, bonds, silver you name it. But I was going to be smarter than them. I figured that to be successful you had to specialize, concentrate on one market only and become an expert. I started reading books on technical analysis, reading the trade magazines and learning all I could. One thing became obvious, the professional traders were all saying the same thing. I knew I was on the right track.
I still vividly remember the first trade. It was May 1985. I could not wait to get to the broker, so I took a cab. It was in the afternoon. I got to the office looked at the screen, and told everybody around me: "These bonds are going up". I placed an order to "BUY". Got filled very quickly, and placed my sell stop 5 ticks lower. Shortly after the bonds pulled back, stopped me out by just one tick, and proceeded to go up over the next several months $30,000. I will never forget that first trade.
No big deal. Trading is risky. I had to learn more and be patient. I spent the next several weeks just watching the market, plotting manually my charts and talking to other traders. I soon started to notice certain set ups. When they occurred there was a very good chance of making a profitable trade with limited risk.
My big chance came one Thursday. We were waiting for some government report, I saw the setup on the screen, and my reaction was automatic. I SOLD the bonds and one hour later I got out with a profit of about $650. I could not contain myself with excitement. Called my wife to tell her, and settled in to watch the rest of the day. And even though I saw the second setup in the afternoon, after the 50% correction, I did not want to get greedy and resisted making a second trade.
The next day Friday I could not wait to get to the broker, because I knew what to expect. I watched the bonds open up and trade for about an hour or so, then form another setup. I told my broker to place a SELL order just under the days low, to be filled on a breakout on the downside. He turned on me and said "Are you sure you know what you are doing", he even advised me against it. I said I know perfectly well what I'm doing. The bonds broke down, and 20 minutes later I closed my short trade with another profit of about $350. I had made $1000 in just 2 days, using the knowledge I had patiently gained watching and studying the market.
My broker and the people around me could not believe it. They could not figure out how I could be so confident and so accurate about my 2 trades. So I explained to them that whilst they were chasing every market on the screen, I was only concentrating on the bonds, and that I got to know the market and the setups.
Day trading in those early days was very expensive. We did not have the Internet and all the tools traders have these days. I spent the next 2 years day trading with various degrees of success. I made money on my trading, but lost on the commissions. Sometimes it would cost me over $500 a day in commissions, jumping in and out. I also kept losing sight of the big picture. I would make $1000 one week, only to give it back the following week trading against the major trend.
I was not going to give up however. The possibility of becoming a BILLIONAIRE in 7 years or less was irresistible. I kept studying and learning, and one thing kept coming up. All the successful traders were advising us to think LONG TERM.
One day I manually converted my daily data into weekly data, and passed it through a simple stochastic program that I had written to see how it would perform. The difference was astonishing. The data was smoother, the indicator became better, my average trade increased dramatically and false signals could be filtered out more efficiently.
It took several years later before I started to develop the ATS-3200. In the meantime I used all kinds of strategies. I even traded a very promising option system. I kept journals of all my trades, recorded my mistakes. I wrote down all my observations and all my rules, but it became very difficult to remember everything under the emotional stress of trading.
In 1992 I started to write the ATS-3200. I called it the ATS-3200: "ATS" for Advanced Trading Systems, and "3200" because the bonds traded in ticks, 32 ticks to one full point.
In the beginning the system was very simple. Weekly data to reduce noise, a long term indicator and a simple filter. The average profits per trade, although they were decent, were not very impressive. The big break came when one day I observed that during the big trade of September 1985 to April 1986(over $30,000), from January 10, 1986 to February 7, 1986 the market kept going higher and higher, but my stochastic indicator during those 5 weeks turned negative and my system got out of a very good trade.
Therefore I reasoned: why get out of the trade just because the stochastic turned negative, if the market is still moving higher. So I started to develop the adaptive filtering algorithms(the V-Filters) that keep the system in a good trade with the major trend. The improvement in the performance was amazing to say the least.
The next big break came when I reasoned out that there had to be a better way to enter into a new trade, than wait for a cross over in the stochastic indicator, which lagged the market, and give up so much of the profits.
At this time I read 2 articles on Futures Magazine one on Neural Networks and one on Genetic Algorithms. Immediately a light went up in my head. I knew what had to be done. Over the next several months I developed the "X" and "L" genetic algorithms, that literally have performed miracles by going short at the very top and long at the very bottom, practically every year since 1993, when the system was first completed.
In fact the very first trade was signaled right at the top by one of the "X" algorithms.
Over the years I kept improving the system and the ATS-3200 has proven itself again and again. Over the years it has been consistently in Futures Truth Top Ten Tables, and it is one of the top T-Bonds trading systems of all time: Click here for details.
Charles J. Tanti B.Sc.(Eng)
Algo Systems Developer Inc.
|The Function TREND makes the ATS-ZB32 almost Perfect