For Mikkel Thorup and his two partners at Swiss-Danish currency group Capricorn FX, trading is neither fancy nor avant-garde. “We’re not trying to do neural networks or things like that,” he says. “We just find what works and get to work.”
The results bear him out: since launching in 1999, the group is averaging 25.14% per year with a Sharpe ratio of 1.45 and a maximum drawdown of 13.19%. Today, they have more than $60 million under management.
They utilize three short-term OTC currency strategies in three currency pairs: USD/EUR, USD/CHF and USD/GBP. In February, they launched a medium-term program utilizing OTC currency options in these three plus other pairs.
The short-term strategy employs three different programs on three different time frames, none longer than two days.
The shortest-term program is a moving-average-based momentum approach designed to grab intraday moves. A slightly longer-term component uses countertrend indicators based on proprietary overbought and oversold bands on charts from 30 minutes to two hours, with positions held for anywhere from five minutes to two hours. The longest-term component uses trend-following indicators on one-hour to four-hour charts, with positions held for up to two days with wider stops and lower gearing.
Although the program has specific entry and exit levels, they use discretion when placing the trades. “The final say is in our minds, even for momentum trades, and one person always has his finger on the trigger,” Thorup says, adding, “The human brain is far superior to a computer.”
Not least because the brain is more flexible and can make finer distinctions. “We’ve seen most of the interesting movements in forex over last 15 or 16 years,” he says. “We can see something we’ve seen before, but if it doesn’t seem to be acting the way it used to, we can reduce the size of the trade, or, if we have a lot of confidence, add to it.”
Their trades are technical, but they avoid the market when a major report or other foreseeable fundamental event is scheduled. “You can get a lot of fundamental noise when these events happen, and some people can make money on that noise, but I see it as flipping a coin. I don’t want to trade on that sort of stuff.”
The Copenhagen native got into the markets sixteen years ago at the age of 20 as a retail securities broker. A year later, he went to commodities specialist Husted, Jessen & Zahl International, where he first became exposed to currency futures on the Chicago Mercantile Exchange.
There he encountered John Murphy’s Technical Analysis of the Futures Markets. “The indicators I learned then are the same ones we use today: moving averages, overbought/oversold, MACD, relative strength…”
Itching to trade, he took a job as a broker trainee at Credit Suisse, which brought him to Geneva in 1995. “The bank basically let us develop our own trading techniques, but they made sure we followed their money management,” he says. “They were mostly concerned that we learned about compliance and how to measure risk.”
His returns were good enough that, a year later, he got an offer to be a proprietary trader at Smith Barney, where he traded spot currencies and futures on the major stock indexes for the bank’s book until 1998 when he started Capricorn.
“It was rough at first,” he recalls. “I had $3 million in seed money, and thought that with my results, about 15% a year non-leveraged, I’d have no trouble getting clients.” For two years he handled trading and sales on his own, but in 2001 decided to set up an office in Switzerland to attract institutional money, and brought in Swiss native Martin Zoller to administrate. The two contracted marketing consultant Mike Rasmussen to get out the word, and he became a full-timer in 2004.
By then, they’d brought in another Dane, Lars Buhl, to help with system development. “He’s got a great mind for markets, and I had wanted to work with him since my days in Copenhagen,” Thorup says.
Thorum and Buhl spent nine months perfecting the new options strategy. “We developed it after seeing changes in the market,” Thorum says. “We had lots of long, flattening, congested markets going nowhere, in a range of 200 to 300 pips, and we began to look for ways of exploiting it.”
The options system was up more than 9% in its first two months of trading. “We start with a one-month options straddle, and then trade spot against the straddle.”
He says the system makes money when the market is range-bound or trending, and only loses if the market closes a month within a narrow monthly band of where the position was initiated. “The important thing is that we’re not net sellers of options, we are only paying premium. So we won’t get hurt if volatility returns, and we and the client know exactly what the max monthly risk will be.”