The Relativity Trading System

Introduction

Id like to thank you for your interest in the Relativity Trading System. After reviewing the following article, I am sure you will agree that we have created something unique.

Let me start out by introducing myself. My name is Dean Hoffman; Ive been in the commodity business for over 23 years. The last 17 of those years I have researched and developed commodity trading systems. In 2001, I formed a financial software company that developed commercial trading systems. One of those systems did so well that the Futures Truth company, an independent trading system evaluator, twice gave me an award for having one of the Top Ten Trading Systems of All Time. My experience ranges from running my own futures brokerage firm at the Chicago Mercantile Exchange, to my current position as a licensed Commodity Trading Advisor and owner of DH Trading Systems and Hoffman Asset Management. I trade around 17 million dollars in the futures markets daily using my trading systems. It is from these many years of experience that I have refined the ideas that I am about to share.

Trading System Basics

Experienced traders may want to skip ahead to the section about Relativity. In this section, we are going to explore some of the fundamentals.

Trends

The first basic that needs to be understood is trend. Trends are the basis of all trading profits. Prices must trend higher from where a trader bought to make a profit, or prices must trend lower from where a trader sold to make a profit. Some will argue that they are counter-trend traders, but even they need a trend in price (no matter how short term) to make a profit. When investors think about it, trends abound everywhere. Temperatures gradually trend from warm to cold as winter approaches. Gasoline demand gradually trends higher during the summer driving months. Ground moisture trends from moist to dry when a drought approaches. Interest rates trend from high to low or low to high over time and so on. All these events can create sustained price trends in the futures market. It is from these trends that we look to profit. Systems like these are often referred to as trend following systems. Calling them trend following is right because they do not try to predict trends. Rather they look to jump on board trends once they have begun. There are numerous empirical studies that prove that commodity markets trend well.

The real difference among traders is how they determine the beginning and end of trends. A trader might define the starting of a trend as basic as a change in the direction of a moving average. For example, some traders might use a rising moving average of prices as a signal that the market is ready to go even higher. Counter-trend traders might use this same indicator as a symbol that the market is overbought and getting ready to head lower. Both are potentially correct depending on their exits. The question is how can we quantify these trading approaches and code them into profitable trading systems.

Position Sizing and Money Management

Along with entry and exit methods traders must also have an excellent position sizing and money management plan. Even if their entry and exit is 90% accurate, but they risk it all on every trade, at some point they will lose all their money. By the same token, a system that is only correct 10% of the time but has proper money management could do well. The bottom line is that traders need to know precisely how much of their account to put at risk in any given trade. Also, needed is to know how many positions to buy or sell when there is a signal. An expert system should provide traders with this information.

Systems Definition

A system can be defined as a combination of entry and exit techniques along with a proper money management plan. Some people are content to trade one system while others may combine many systems.

Trading Psychology

The final piece of the puzzle is proper trading psychology. It does not matter how brilliant a traders systems are. If he is unable to take the heat during the inevitable drawdown periods, he will fail. If he gets too ecstatic during winning periods, he will also tend to fail. The key is emotional consistency and the ability to stick to a system through thick and thin. Traders must have complete confidence in their approach. This is where extensive (and proper) testing can help. Testing helps to build up the proof that what a trader is doing works over the long run.

In summary, traders need to have an edge. This edge should consist of:

1. Proven entry and exit techniques

2. A proven position sizing and money management plan

3. Proper trading psychology

Keep in mind, it is possible to expand each one of these three points into a book of its own, but my purpose here is simply giving traders a high-level overview.

The Relativity Trading System

Now that we have laid the basic groundwork, lets get into the specifics of the Relativity Trading system.

Relativity is a combination of 5 different trading systems. By trading 5 systems, traders can have greater diversification than they could just trading one system. All the systems are trend following but also incorporate counter-trend following parts. Once again, this helps add to diversification. These five different systems also communicate with one another and trade together as one integrated unit. For example, if one system has already bought the Japanese Yen, then the other four systems know not to take any more trades in that market. Doing so would not help to diversify but just raise the risk in the same trading idea.

The Relativity Trading System uses more than just price direction as its method to generate signals. Rather, it uses sophisticated pattern recognition techniques to identify the best risk-to-reward entry points. It then uses a series of different exits to limit risk* and lock in profits*. Many customers find the exit methodology pleasing. The reason is that unlike many trend following systems, Relativity tends not to give much profit back after a large move in its favor.

Dynamic Portfolio

One unique aspect about the Relativity Trading System is its dynamic portfolio logic. Unlike most systems that predefine a smaller portfolio to trade, Relativity trades almost every commodity market. It does this while still having low minimum account size requirements. The reason is that it is dynamically ranking nearly all the markets into percentiles on a daily basis. It then narrows that list down to only those markets that have the highest relative trending potential. The net result is that only a few markets may be on its radar at any given time, however, that small list is constantly changing depending on where the best opportunities are. The benefit is that traders do not have to worry about the best trends occurring in markets that they do not trade!

Money Management and Position Sizing

The Relativity Trading System also thoroughly handles position sizing and money management. It specifically manages how many contracts to enter when a trader gets a trading signal. This is essential because different futures contracts have different volatilities. Trading them all in equal numbers would not be properly diversifying. For example, if one contract tends to have high-volatility traders would trade fewer contracts than one that had lower volatility. Relativity uses a traders account size to determine the proper position size for each trade.

Frequently the right position size is zero! There are four reasons for this. First, the trade occurs in a market that was not strong enough in rank to be in the dynamic portfolio. Second, the risk in the trade was too high given the account size. Third, there was already enough or too much risk held in that given sector. Fourth, there was already enough or too much risk across all the current positions in the portfolio.

Relativity does not look to risk more than 1.5% of a traders account size on any given trade. It also does not risk more than 5% of their account in a given sector. For example, let’s suppose that a trader purchases crude oil for his account. If the risk in that trade were 5% or more, then Relativity would not take any new trades in a highly correlated market such as unleaded gasoline. Relativity also looks to risk no more than 10% of a traders entire account at any given time. So if every trade a trader were in hit its stop price simultaneously this should represent no more than about 10% of the traders account equity. Once the risk level gets to or above this 10% level Relativity will reject all new trades (give a zero position size).

*(please see disclaimer on limiting risk amounts)

Summary

In summary, the Relativity Trading System combines all the parts that I believe traders need to be successful trading commodities. Relativity not only diversifies across many winning systems, but also across nearly every commodity market. Combining this with its conservative position sizing and money management creates a system that should exceed traders expectations.

To watch an informative video about Relativity click the following link: http://www.youtube.com/watch?v=z0ZzVTUwjAc

Dean Hoffman

DH Trading Systems

IMPORTANT RISK DISCLOSURE

*Risk percentages cannot be guaranteed, occasional market conditions could cause a traders stop loss orders not to be filled at the specified prices

Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.

Past performance is not necessarily indicative of future results.

Please read carefully the CFTC required disclaimer regarding hypothetical results below.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF 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 WHICH CAN ADVERSELY AFFECT TRADING RESULTS.