Trend following game theory

April 30, 2016 09:00 AM

Andrew Strasman has had a long and eclectic career in trading that began with a love affair with gaming. He won an Odyssey 2 game system in a competition when he was 12. “If you play level zero, you can’t shoot, but all you had to do was not die and you got points,” he says. He learned his first lesson in trading and trend-following, and he traded that gaming system for a computer and begin programming. 

After receiving a degree in Finance from British Columbia Institute of Technology he took a job at an introducing broker in Vancouver. He wanted to trade futures, as his earlier involvement in trading soured him on the world of equities. 

As a gamer the idea of studying technical trading systems was natural for him. The IB he worked for went through futures broker LIT where his programming skills impressed the Chicago desk, leading to an invitation. “I knew I had to get to Chicago,” Strasman says. “I realized that if I was going to take this industry seriously I was going to have to move to Chicago and work on the floor before it went computerized.”

His first day was when the Russian debt crisis hit and because he had experience trading he ended up holding a subdeck for one of LIT’s brokers in the bean pit. From there he moved to the bond desk and did out trades. As Strasman worked various jobs in the markets he developed a great network of contacts that would lean on his programming skills. 

A friend asked him to work on a highly secretive development project. Turns out that Strasman got a glimpse into the thought process of the original turtle trading system. It changed his philosophy on trading. 

“I thought, ‘I get it,’” Strasman says. “You are playing cards; you’ve got an ante, you are not going to raise with a weak hand, [you press your advantage], it’s just proper game theory and I though, ‘Oh, that is genius.’”

Strasman rethought how he looked at markets and started to trade as a turtle, and began making money. 

“It is important to trade a style that matches [your]inner psyche,” he says. “Trend-following really matched my inner psyche. Keep your losses small and let your winners run. It is something I read about, and then lived; I finally got what they have been talking about.”

One of his early contacts was Don Wilson, founder of DRW. Wilson staked him for $300,000, which he ran up to $1 million. “It was 1997-98 during the Asian crisis which was a great time for trend-following strategies,” Strasman says. “I was up $700,000 in my first year. 
He said, ‘Nice job, now do the same thing with $2 million.’ What I know now that I didn’t know then is that after a fantastic year in a long volatility strategy, [you typically struggle]. I was breaking a lot of rules because I was undercapitalized and was lucky to be trading that style during a great environment.”

Strasman left DRW to work with a group of equity traders exploiting a structural edge in the market. They day-traded equities and were able to exploit that edge for five years before it went away. 

By this point Strasman was looking to start a CTA and shopped his systematic approach. He partnered with a group and tested his strategy on a diversified group of futures in 2007. It went well and CTA Gladius Asset Management was launched. Gladius began trading 
for real in 2008—the perfect time to launch a trend-
following strategy. It earned 49.09% in 2008. 

Key to his approach is an automated system that rates each signal from 0-100, where the highest rated signals take a larger position. He refers to this a probabilistic decision-making process. “You want to have the big bets down on the best trades,” he says. 

The atmosphere for trend-following changed by 2013. Strasman wanted to initiate upgrades to his system, and ended up launching Totem Asset Group in 2014. “It is a different program but the genesis of it goes back to what I was doing at DRW. It is still a breakout trend-following strategy,” Strasman says. 

He now trades two systems: A short- and long-term breakout system. “Most breakouts fail, so if you have a short window, you are going to get a lot of trades and a lot of losers,” he says. “If you go further out you are going to get a better quality of signal.”

He combines the best of both to enhance returns. Strasman also added inter-commodity spreads, changed execution tactics, smoothed risk parameters and changed the probabilistic decision-making process, applying it to every market. 

The enhancements worked as Totem returned 16.9% in 2014 and is up 4.44 year-to-date after a small drawdown in 2015. Strasman was inspired by military strategist John Boyd who coined the OODA Loop: Observe, orientate, decide and act. “That is precisely what I am doing every 10 seconds of every trading day,” he says.

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.