Dear Fast Break Plus Subscriber, Welcome to this week's issue of FutureSource's service, Fast Break Plus. Today's author of Fast Break Plus is Charles Tanti. Charles Tanti has been trading The 30 year US T-Bonds for the last 20 years and shares his trading advice and methodology every week during a online seminar at his website www.ats3200.com.

Charles Tanti is the president of Advanced Trading Systems Inc.("ATS"). ATS is a futures trading systems developer of Long Term Trading Systems. The company licenses 2 trading systems: the ATS-3200 trades the 30 year T-Bonds, and the ATS-6400 trades the 10 year T-Notes. Both systems have been consistently in Futures Truth top ten tables over the last 2 years, and the ATS-3200 presently is in the #3 position with an annual performance of 225.2% and also the top T-Bonds trading system. Both systems can be traded by "Broker Assist" at RJOFutures.

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Developing a Profitable Long Term Trading System
By Charles Tanti

Smart Traders Trade Long Term

What is a trading system? A trading system is not the "Holy Grail". Most traders expect too much from a trading system. If a system makes a few losing trades they usually give up just when the market is about to turn in their favor. A good trading system is nothing more than a tool to turn the odds in your favor by employing a proven consistent trading methodology.

To be successful, a trader must overcome hope, fear and greed and learn to be patient. The market is always right. A trader needs to pay close attention to the market. He must be able to analyze and interpret the information in the charts correctly and objectively without any emotion. Risk is a part of trading, and it cannot be avoided or eliminated. The successful trader knows this and accepts risk as part of the business of trading. However, he also has the knowledge and confidence that risk can be controlled.

To trade a system profitably, one must have the discipline to execute the signals generated. Discipline comes from confidence, and confidence comes from knowledge. Therefore, it is very important to understand how your system works. Confidence and discipline also comes from experience, and therefore a trader must have the patience to observe a trading system in real time to see for himself how and where signals are generated.

Every trader knows that in trading TIMING IS EVERYTHING. If you can time your trades perfectly, you will never have to worry about a drawdown. But, as everyone knows, it is not as simple as this. No matter how good you are at technical analysis, most of the time the market is confusing:

Is it going up, or
Is it going down, or worst
Is it going sideways.

Most traders, especially day traders, look at the market too closely. If you look at the market on a day-to-day basis, eventually you will lose sight of the big picture. In other words, you will get confused about the long-term trend.

We all know the saying, "THE TREND IS YOUR FRIEND". There is also another saying, "A FRIEND IN NEED IS A FRIEND INDEED". As a trader, your only "FRIEND" is the "TREND". As long as you trade with the trend, you should not be too concerned about timing. The "TREND" will always come to your rescue, as long as you stay with it, and as long as you trade in the direction of the major trend.

1. Be well capitalized.
2. Have a good trading plan.
3. Be objective.
4. Have a long-term view.
5. Conquer hope, fear and greed.
6. Be able to trade with the odds in your favor.

In other words, you need a trading system.

The key elements of a Profitable Long Term Trading System are:

1. Choosing the right market to trade.
2. Choosing the right price data to reduce noise.
3. Choosing a reliable long-term indicator to find the major trend.
4. Applying a simple filter to stay with the major trend.
5. Using more filtering algorithms to improve the performance.
6. Incorporating genetic algorithms to sell near the top and buy near the bottom.
7. Using functions to keep drawdowns to a minimum, reduce the number of losing trades, and lower risk.

1. Choosing the right market.

A long-term trading system, if it is going to be profitable, needs a market that has a tendency to trend for long periods of time. The trend must be evident on daily and weekly charts. Examples are the T-Bonds and T-Notes markets, as well as Currencies. These markets are driven by interest rates, which in turn are driven by the state of the economy. These forces do not turn on a dime. They build momentum and move in the same direction for months or years at a time.

2. Choosing the right price data to reduce noise.

The data you feed into the system is very important. Daily price data usually has a lot of noise, which in turn can produce a lot of false reversals that can generate false trading signals, which are very hard to filter. On the other hand, weekly data is smoother and makes the major trend more evident. Weekly data also will have less noise in it and therefore will produce fewer false trend reversals.

3. Choosing a reliable long-term indicator to find the major trend.

Indicators are a mathematical way to measure the state of the market. I have been developing and creating indicators for my systems for the last 12 years. During this time, I have found out that simple works better. For this reason I prefer a long term stochastic.

Stochastics work the same way as moving averages, with one big advantage. A stochastic will show the trend of the market and can also indicate when a market has become over bought or over sold. For this reason, the elements of the stochastic can be applied to generate better buy and sell signals, at or near market bottoms and at or near market tops. This is much better than taking the signal from sign changes in the stochastic alone, which usually lags the market and will miss up to $3000 or more from the market turning point.

Results of applying an 11 week stochastic only to T-Bonds weekly data in the ATS-3200.

Trade summary.

Total number of trades: 175
Number of winning trades: 85
Number of losing trades: 90
Total Profits: $44,125
Average Trade: $252
Average Profit: $2700
Average Loss: $2060
Biggest drawdown: $11,781

No matter how good the indicator is, it will have false signals generated by minor trend reversals. A good system must be able to filter out these minor reversals, otherwise most of the profits will be dissipated. Markets are dynamic. They can become more volatile or move faster. A good filter should be adaptive to changing market conditions. In the ATS-3200, this filter improves the performance by 159%.

Results of applying an 11 week stochastic plus a simple filter to T-Bonds weekly data in the ATS-3200.

Trade summary.

Total number of trades: 133
Number of winning trades: 83
Number of losing trades: 50
Total Profits: $127,781 (+190%)
Average Trade: $960 (+281%)
Average Profit: $3031
Average Loss: $2476
Biggest drawdown: $6,745

5. Using more filtering algorithms to improve the performance.

The performance of a trading system can also be vastly improved by applying filtering algorithms to the long term indicator, in this case a long term stochastic. For example, the stochastic may go from "-" to "+", i.e., from negative to positive while the system was is a short trade. In this case, this will be a signal that the trend has changed. However, the market may still have moved lower. The close could be lower or the low could have gone lower. Therefore, even though there was a sign change in the stochastic from negative to positive, since the market actually moved lower the filtering algorithm could filter this false signal out and keep the system short in the direction of the trend.

A number of these simple yet powerful filtering algorithms can be designed and incorporated into a trading system to improve its performance. In fact, both the ATS-3200 and the ATS-6400 each have nine such filtering algorithms called the "V-Filters". In the ATS-3200, these 9 filtering algorithms improve the performance by 58%.

Results of applying an 11 week stochastic plus filterting algorithms to T-Bonds weekly data in the ATS-3200.

Trade summary.

Total number of trades: 115
Number of winning trades: 82
Number of losing trades: 33
Total Profits: $201,812 (+58%)
Average Trade: $1745 (+81.7%)
Average Profit: $3482
Average Loss: $2538
Biggest drawdown: $6,745

A long-term trading system usually gets the signal for the trend from either a moving average or a stochastic. These indicators lag the market, and unless the market keeps the trend for very long periods of time and there is a substantial price difference between the top of the market and the bottom of the market, it is very difficult for a system to produce good profits. This is because a slow moving average or a long term stochastic normally misses up to $3000 from the top and up to $3000 from the bottom, i.e. $6000 in all.

For a system to be truly profitable, it must be able to signal when a market is just going to turn around. Therefore, the system must be able to go short at or near a market top, and also be able to go long at or near a market bottom. This is possible by designing and creating genetic algorithms that track several indicators inside the system to signal an extremely over bought or an extremely over sold market.

Since commodity markets cannot go up or down forever, they inevitably become over bought or over sold and turn around. A good algorithm will track a main indicator, but will only generate the buy or sell signal after a signal has been verified by several other built in indicators to produce more reliable and accurate results. Both the "ATS" systems have 15 such genetic algorithms. These are called the "X" algorithms and the "L" algorithms. There are six "X" algorithms, these generate the "SELL" signals, and there are nine "L" algorithms, these generate the "BUY" signals. In the ATS-3200, these 15 algorithms further improve the performance by another 127%.

Results of applying the stochastic, the V-Filters and the genetic algorithms to T-Bonds weekly data in the ATS-3200.

Trade summary.

Total number of trades: 105
Number of winning trades: 83
Number of losing trades: 22
Total Profits: $458,718 (+127%)
Average Trade: $4368 (+150%)
Average Profit: $6073
Average Loss: $2062
Biggest drawdown: $6,745

Note: Notice also the number of secondary trades and profit generated by the algorithms.

7. Using functions to keep drawdowns to a minimum, reduce the number of losing trades and lower risk.

A good system must have functions to manage a trade once it is started and to keep losses to a minimum. For this reason both the "ATS" systems have the following built in functions:

a. The "Stop Loss" function. This function calculates and sets the stop when a new trade is started. It is an adaptive function and is controlled by market volatility.

b. The "Moving Stop" function. This function moves the stop, once a trade is making sufficient profit, and prevents many profitable trades from turning into losing trade, therefore reduces the number of losing trades and protects profits.

c. The "Drawdown Parameter" function. This function takes the system out of the market when a trade starts to lose money, and at the same time the market has turned against the trade. This function too reduces the number of losing trades.

d. The "Fail Safe" function. This function prevents the system from entering into a trade if the chances of making a profit are not very good. For example if the system gets a signal from the stochastic to go long, but at the same time the market is already over bought, this function will take the system, or keep the system out of market until there is another change of direction and the system gets the signal to go short.

I go over these principles in more detail during my on line seminar which I start every Sunday. Those interested should go to my web site, Advanced Trading Systems and register for the seminar. I am also always available to answer questions and to help everyone until they are totally confident using the "ATS" systems.

Statement of Disclaimer: This report includes information from sources believed to be reliable but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report cannot be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

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