Brooks Brown grew up in the heart of the cotton trading industry in Memphis, Tenn. but did not plan on trading cotton or anything else until he saw a trading video his senior year at Southern Methodist University.
The video featured Paul Tudor Jones and was inspirational for Brown not only for its content, but because Brown discovered he had a lot in common with the futures trading legend.
"Something clicked there when I realized that he was also from Memphis and he went to the same high school as me. I started learning more about the commodity world and moved to Chicago in 1996," Brown says. "That gave me a spark and maybe flipped a switch. I thought this was something to get into."
Brown was inspired, moving to Chicago to explore the futures markets despite not even having a job. "I knew two guys from Memphis that had been working there for a year and they gave me some couch space. I found a job and it ended up working out. But I moved there with a suitcase and really didn’t have a job."
Brown spent two years in Chicago working at an options desk on the Chicago Mercantile Exchange’s financial floor and the Chicago Board of Trade’s grain complex. After two years, he got an offer from Memphis based McVean Trading and moved back home. "Initially, I was a soybean oil analyst and then I was a lean hog analyst. So I got some fundamental knowledge and a foundation built on fundamentals," Brown says.
While at McVean, he began to trade and befriended an older trader named Martin Hilby, who previously mentored McVean founder Charlie McVean. Hilby taught Brown about trading and introduced him to technicals. "His philosophy was that you could incorporate technicals with fundamentals and trade the markets more efficiently. I took that angle and over the next two years built a technical strategy," Brown says. "He and I just sat down and talked about trades. He gave me some ideas and showed me what his philosophies were. I took some of his ideas and melded them with some of the newer indicators that are out there and came up with a few proprietary indicators."
Those indicators formed the basis of Brown’s technical approach, which has produced stellar returns in proprietary trading for McVean and form the basis for his commodity trading advisor (CTA), Cypress Capital Management. Brown earned double digit returns trading proprietary money in 2006, 2007 and 2008 trading grains, meats and softs before launching his CTA in 2009.
Despite his background in fundamentals, he uses them sparingly. "When I do use fundamentals as a basis of a trade, it is more from a risk management standpoint. If the fundamentals are fully in line with me, I may add a little risk to a trade. If they are fully against me, I may take a little risk away from a trade. I am never going to take any trades purely based on fundamentals, it has to line up with my technical strategy," he says.
Although he relies on technical inputs, Brown’s trading is not systematic but discretionary. "I have a combination of charts, patterns and indicators that I have used over the years that give me trading ideas. I still am able to incorporate fundamental ideas that I hear from contacts in the industry. I include commitment of traders, flow of funds [and] correlations; [all of which] I consider fundamental," Brown says.
He adds that the short- to medium-term technical approach suits his personality best. "Long ago I came to the realization that, psychologically, I didn’t have the makeup to put on these big fundamental positions and just sit with them and add to them and see if they eventually turn around for me."
Cypress trades all the liquid markets in the grain, livestock and softs sectors. "If I grow, I want to be able to trade what I am trading now when I am at max equity," he says, estimating his capacity at $250 million. Not quite Paul Tudor Jones territory, but if he can produce as he has so far it is something to shoot for.
Brown estimates that 75% of the money traded in the market comes from technical based programs. "You can be right fundamentally, but you may not be able to remain solvent long enough to see it to fruition. The technicals allow me, before I enter a trade, to know [where I will get out]. I am able to define my level of risk."
And he likes to keep his risk low, using on average only 2-4% margin to equity. That low risk approach probably helped him in 2009, a difficult year for CTAs. Despite the rough environment, Cypress managed to eke out a small profit helped by positive trades in sugar and, of course, cotton. "I couldn’t have picked a worse time to launch my own firm, but it is what it is. A lot of people lost money, I got myself [to positive] by the end of the year."
Brown buys breakouts and sell breakdowns. "I feel like I am stalking markets at times, like you are on a hunt waiting for it to make a decisive move that will give you an entry point."
Cypress is up 5.44% through September in 2010 and Brown has set a solid foundation. He trades out of the historic Cotton Exchange in Memphis that houses quite a few successful CTAs. Brown hopes to extend that tradition.