One mean profit strategy

July 30, 2015 09:00 AM

Chris Ring earned a mechanical engineering degree in 1988 from the University of Detroit and an MBA from the University of Michigan four years later. It was the appropriate educational background for a career in the auto industry and Ring has worked at Ford Motor Company (F) for 25 years. 

It also isn’t a bad background for someone interested in building mechanical trading models. “I always had a love for trading, so as soon as I was making money I started to get involved in stock trading and started an investment club,” Ring says. “I developed a fascination with mechanical models; I love data, I am an engineer.” 

Around 2002-03, programs like MetaStock and TradeStation became available to the masses and allowed tinkerers with solid technical backgrounds like Ring to do some serious analysis. “I started testing some of those ideas and refining them,” he says. “From that I developed a stock model that was quite reliable that I trade myself. That is how I got started. I enjoy math, I enjoy statistics. It was the mechanical engineer side married to the MBA side that came together for me.”

He developed an algorithm to trade stocks and launched a registered investment advisor in 2004. He cashed out in 2007 as volatility began to pick up and took a break. 

“Just for fun I started testing it on futures and the model worked very well,” Ring says. 

The program was so successful that he wanted to share it. “I dialed it in and tweaked it to the type of [more conservative] returns that would be marketable,” he says. Ring understood the difficulty of launching a new program so he signed up one friend in 2012 to start building a track record for Ring Capital Management that traded E-mini S&P 500.

The program is a short-term mean reversion strategy that only trades in the direction of a longer term established trend. “I developed my own take on the trend indicator for the intermediate to long time frame,” he says. “There are a couple of traditional technical indicators and a couple of my own. All put together in such a way that it trades infrequently by design; six to 12 times a year.”

The program proved itself, earning a compound annual return of 18.85% over that three-year period with a worse drawdown of 5.93%. That drew more customers and Ring’s S&P E-mini Select Program is up 9.41% in 2015 through May. 

The program has produced a slightly negatively correlation to equities despite only trading S&Ps. The trend element only defines the market condition. Positions only can be taken in the direction of the longer-term trend and that trend has been bullish for the life of the program. 

“When it is determined that there is a trend then there has to be a movement, acceleration away and depth,” Ring says. “Then it will jump in. It has to be a depth and a force of a movement away from the trend.”

The strategy is highly selective, only producing 21 trades in 3.5 years, 20 of which have been profitable. “We can go as long as three months or more where nothing happens. On average there are 46 days between trades with the least being three and the most being 162,” Ring says. “It is really dialed in tight to go for the statistically highest likelihood trades based on our indicators. That is why we are over 95% profitability on trades.” 

While the strongest element of risk management may be the program’s selectivity, Ring only uses catastrophic stops. “Traditional stop losses serve to lock in losses,” he says. 

His margin to equity target is roughly 25% and he sets his catastrophic loss slightly higher. While this may seem extreme, it has never been hit in 3.5 years of trading or in backtesting going all the way back to 1998. Trades last seven days on average and Ring sets a new exit target each day. The exit could be a loss depending on how the market moves. 

The long-term element looks at prices and movements over nine months. It last indicated a bearish trend in the 2008-09 period. 

While the program and performance is at the point where Ring can manage this full time, its selectivity allows him to keep his day job as a product planning manager. 

“If I went full time with this I would probably sit around twiddling my thumbs. There is not a strong need for me to go full time with the strategy.” 

Seems to be working for Ring, and his investors.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.