Keith Fitcshen

President of TradeSystem, Inc. ( http://www.trade-system.com )
CTA / System Developer of Aberration, Aztec, I-Master, FX Master
Interviewed by John F. Gallwas, Founder of Striker Securities, Inc. - April, 2005

Keith Fitschen is the President of TradeSystem Inc., which is registered as a Commodity Trading Advisor (NFA # 271285) with the Commodity Futures Trading Commission. He is the developer and marketer of three very successful trading systems and is considered by many to be one of most dedicated professional technical analysts in the industry.

While in the Air force, Keith Fitschen split his time between flying and engineering, but it was his engineering studies that led him begin to focus on developing systematic trading models for the markets. He introduced his first successful system in 1993, which was ranked twice (1997 & 2000) by Futures Truth Magazine as “one of the top trading systems of all time”. The secret to developing successful trading systems is hard work and objective analysis and for those interested in how it’s done Keith Fitschen has prepared a 1.5 hour tape on the subject, which is available free-of-charge by simply asking Striker for a copy.

Consistent with our no-conflict policy, neither Striker nor any of its employees have any financial interest in TradeSystem Inc. or trade any of its products. This interview is for educational purposes only and is not a solicitation.

1. Before we discuss your systems, in your opinion what are the most important factors the system buyer should look for when considering a trading system?

I believe that the single most important factor is the degree to which the system is curve-fit. Because all systems are developed on past data, they are curve-fit to a certain extent; that can’t be avoided. The problem with a curve-fit system is real-time performance. It won’t come close to matching the performance of the development sample.

I use statistics to measure the degree of curve-fitting in my systems, and I’ve found that you must have thousands of trades in your development sample to minimize curve-fitting.

Systems that have different parameters for each commodity are highly curve-fit. Systems that have different rules for different commodities are highly curve-fit. The only way I know to generate thousands of trades in the development sample is to develop across a large basket of commodities (I use 57 world-wide commodities). At the end of development across the basket, you will have the necessary thousands of trades, even though you only have 50 to 200 on each commodity.

When I explain this in my seminars, people question whether using the same parameter set doesn’t imply that I believe all these commodities trade the same. I know that oats doesn’t trade the same way as the S&P, but I don’t have enough data on either to generate the thousands of trades necessary for them to earn their own parameter set.

Beyond curve-fitting, I think the second most important consideration is expectations. Most system purchasers look at the gain and ignore the pain. They visualize an easy road to wealth with few stumbling blocks. The fact of the matter is that outsize returns are always accompanied by outsize risk. Most people will have a tough time actually trading through 20-30 percent drawdowns, but when they purchase the strategy they note the drawdown mentally conclude, “I can trade through that type of drawdown to get 50-80 percent returns”. They’re too focused on the gain side and not realistic about the pain side.

2. What are the characteristics of the three trading systems you currently offer and what should a system buyer expect in terms of risk as well as reward from each?

We offer three systems that are each very different. Aberration is a longer-term trend-following system that is the core of my trading. Aztec is a shorter-term, volatility-based system that is very lowly correlated with Aberration. In fact, when Aberration is having a tough time due to lack of trends (2003 was Aberration’s first losing year since it’s release in 1993), Aztec does it’s best, and vice versa. The third system is I-Master, which just trades the stock index futures. It is uncorrelated with both Aberration and Aztec.

The independence of the three systems means we can construct portfolios across the systems that are much more consistent in performance than trading any of them alone. Our Starter Portfolio uses all three systems. Aberration trades corn, live cattle, cotton, sugar, palladium, crude oil, and the dollar index. Aztec trades 10-year notes, and I-Master trades an emini Russell 2000. The resultant equity curve is shown below.

The hypotheticals on this portfolio show an average annual return of about $20,000 and an average max drawdown per year of about $10,000. That portfolio could be traded comfortably with $20,000.

3. How would you construct the ideal portfolio using your systems and what should the system buyer expect in terms of risk/reward?

The key is to have systems that are lowly correlated, one-to-another. The following charts illustrates the point I made about Aberration and Aztec performing well in market conditions the other has trouble with. The first figure shows an equity curve trading the following diversified Aztec basket: soybeans, coffee, cotton, pork bellies, copper, heating oil, 10-year notes, and the Japanese Yen. Only trades with $2,000 or less of risk were taken.

Aztec Equity Curve

That equity curve is a direct parallel to Aberration trading its Starter Portfolio, taking trades with $3,000 or less of risk.

Aberration Equity Curve

The following is a comparison of the Aberration and Aztec equity curves:

The equity curves show that performance can be very different during time-frames when one or the other system is having difficulty making money. From about the middle of 1987 through the start of 1990, Aberration made only $5,000 or $6,000 on its Starter Portfolio, while Aztec’s equity curve is rising as sharply as at any time during the run. Again, Aberration has had trouble since March of 2003, while Aztec’s equity curve is very strongly up. A correlation of the two equity curves shows a correlation coefficient of 0.18. That is a very low correlation and shows that the two systems don’t have a tendency to run-up or drawdown together.

4. What do your systems cost and do you have any specials that we can relay to our readers?

Because Aberration had its first losing year in 2003, while Aztec did well, many of my system-assist brokers, including Striker, asked me to provide a package that would give the small trader a better chance of success. In response to that request, we are currently doing a limited time promotion where we will sell Aberration, Aztec, and I-Master for $997. That’s a 94 percent discount off the pre-promotion price.

5. Do you have anything in the “what’s new” department that you would like to share with us now?

I’m about to get more involved in the trader education process. Most starting traders rely on books or material they get from the internet to trade and wind up getting burned. I’ll be promoting a website devoted to traders with low-cost, quality materials. We’ll be providing subscription-based trading signals, newsletters, videos, and course material aimed at educating the trader before he risks his money.

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