Maple Sugar

From MarketsWiki
Jump to: navigation, search
Nasdaq Banner 728x90.jpg

Maple Sugar is a trading program originally created by Defender Capital Management, Inc to trade Canadian Dollar and Sugar #11 futures contracts. The program, along with its companion Big ED, was sold to John J. Lothian & Company, Inc. in 2004.

The program is now traded by John J. Lothian Managed Futures, LLC, which transitioned the managed futures offerings of John J. Lothian & Company, Inc.] into a separate entity in 2011.

Program Background

The trading program was created as an offering for small-account investors, and was designed to be executed with accounts as small as US$50,000. Creating a systematic trading program for ultra-small accounts is commonplace; many emerging CTAs target this market segment as the place to begin building their performance record. However, it is not common to find trading programs that can trade multiple markets for small accounts and still control per-trade risk in an effective manner.

Maple Sugar had three primary requirements to meet:

  • The system had to be able to trade multiple markets simultaneously
  • When in all markets, the total typical risk to a minimum sized account (US$50,000) had to be at an acceptable level
  • The markets had to be (for all practical purposes) uncorrelated to each other in their motion

The futures industry has many markets that superficially match those requirements. Some of those markets, however, were very illiquid, making them unsuitable for trading. Others were liquid but prone to frequent price gaps from session to session, creating an unacceptable probability that prices would move beyond loss targets before positions could be exited. Still others were either closely correlated to each other or, in the case of the Eurodollar market, already in use by other Defender programs.

The Canadian Dollar and Sugar #11 markets were selected therefore more by process of elimination than by some other means of obvious selection.

Program Structure

The program trades based on Defender's core philosophy of, "follow the market, don't guess the future." Trades are taken as the market appears to be reversing into a new direction.

Losses against new trades are usually taken fairly quickly, in the belief that if the market is going the wrong way, the system isn't following the market like it should. In the Canadian Dollar market, gains are left to run for as long as the market appears to be consistently going in the trade's direction. Sugar, on the other hand, has a greater number of little trends, and so a maximum price target exists in that market to take profits out when things have gone "well enough".

The net result is a system that initially behaves in a short-term manner, quickly reversing and occasionally taking small profits in congestion, and switches to a trend-following mode once a sustained move develops. This design works around a particularly irksome problem with more traditional trend-following systems: Many approaches require an extended period of market motion to prove that a trend is forming, before starting the trade. Defender found that too often, these verification periods contained the lion's share of a smaller trend, rather than presaging the arrival of a huge market move, and that by waiting until the small trend was almost over, a lost profit opportunity was combined with a loss for joining the move shortly before its reversal.

The original program was fully mechanical. However, after Defender sold the method and rules to JJLCO, the system's execution was combined with discretionary elements in a move to improve performance by interpreting its signals rather than following them blindly.