From the March 01, 2010 issue of Futures Magazine • Subscribe!

Top traders of 2009


Paul (Bucky) DeMarco was following in his father’s footsteps as a coffee trader on the Coffee, Sugar & Cocoa Exchange when a sting operation of floor traders in Chicago in the late 1980s convinced him that the floor might not be around forever and that he needed to pick up additional skills.
Fred Schutzman was first a student and then an instructor at the New York Institute of Finance, where he studied under and taught alongside famous technical analyst John Murphy.
The two were introduced when DeMarco took a class on technical analysis. “I was teaching the class and met Bucky,” Schutzman says. “His desire was to learn more about technical analysis so he could trade better; my desire was to learn more about trading so I could apply my theoretical knowledge. Everything was nice in the text books but I always had in the back of my mind, ‘can I make money with this.’”
DeMarco says, “Freddy and I are opposites. He likes peace and quiet, I am the trader, the extrovert and loud guy.”

Despite their differences, the chance meeting began a 20-year collaboration and friendship that eventually led to the creation of Briarwood Capital Management.

“I remember our first trade. I told Bucky ‘I am really bullish on 30-year bonds, let’s buy it,’ so he said to me ‘if we are wrong, where is our stop?’” Schutzman says. “And I said ‘Oh my gosh, I didn’t think of that. I realized how much I had to learn. Technicians don’t worry about being right or wrong, you just look at a chart and make a prediction.”

That began a learning curve for both men, with Schutzman learning the realities of trading and DeMarco learning the intricacies of technical analysis.

The two worked well together and Schutzman would expand his studies to computer programming and begin to program their trading concepts. By 1996, they had a program and one customer and they would trade and optimize their method over the next five years. “It was a combination of discretionary and systematic, and by 2001 we were fully diversified and 95% systematic — we were professional at this point,” Schutzman says.

The program launched in 2001, trading three systems: a long-term and two intermediate systems. Two of the systems are trend following in nature and the third system uses pattern recognition.
Schutzman is a fan of Jesse Livermore’s pyramiding approach but was wary of the volatility. “We found that by trading three systems independently we are getting all of the benefits of pyramiding without the downside,” he says. “The systems are buying it piecemeal. If the trend continues, we are adding to our winner. On the best trends hopefully we are fully invested and on the failed breakouts we have less than a 100% position.”

The approach allowed Briarwood to be successful in 2009 despite a difficult environment for trend followers. Their standard low volatility program, which has more than $200 million under management earned 8.77% with the X2 program returning 22.02%.

“We are trading three systems. They enter and exit at different times,” Schutzman says. “Ideally they should have drawdowns at different times.”

The discretion comes in the form of a risk overlay borne of DeMarco’s unease with holding positions too long. “Me being the floor trader, I have more of the shorter-term mind set,” he says. “When markets go up hard, they often come down just as hard. We found that V tops and V bottoms are our worst enemies. It doesn’t give our trailing stops enough time to catch up to price action, so we developed a risk management overlay that says if risk is too great, do something.”

What they do is tighten up their trailing stops or take profits. Their approach is not complex but a combination of Schutzman’s technical knowledge and DeMarco’s trading expertise. “When I was a technical analyst all of the top technicians used simple stuff,” Schutzman says. “Speak to any of the top traders and they tell you simple is better. If you can build something simple with very few parameters, that is likely to work well into the future,” he says. And he should know. One of Briarwood’s models only has eight lines of code but it helped them average double digit returns since 2001 with a solid risk profile and no down years.

Their approach isn’t so odd after all.

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