Gelet: Automating Elite systems

August 31, 2009 07:00 PM

Joe Gelet can sum up his trading philosophy in four words: The market is random.

But as simple as it may sound, that fundamental truth forms the basis for Gelet’s most elaborate efforts. Because, while the market might be haphazard, it has led Gelet to develop automated strategies that definitely aren’t.

A registered commodity trading advisor (CTA), Gelet is the president of Elite E Services, a company that builds and sells trading strategies for the forex market. Human traders, he says, make mistakes and press wrong buttons. But, “with an automated system you have control.”

Just 10 years ago, the industry considered automated trading to be “almost heresy,” Gelet says. But as tools have developed, the tide has turned toward automated systems that don’t depend on the so-called market trends.

“If we can build a strategy for random numbers and prove it works, we can make a strategy for the market,” he says. “In our industry, people don’t really care about trends, they care about what works.”

Gelet does not have a bias towards any trading philosophy, he just tests and builds systems that work. When Futures interviewed Richard Dennis a couple of years back he said, “We took people and taught them to think like traders…[today] I would try and get them to think like researchers.”

That seems to be an approach that Gelet has embraced.

“You build a robust system, and then you plan for the worst and hope for the best,” Gelet says. “[A disaster] could happen every day, and you should still be making money.”

To Gelet, the overall stability of the forex market is its greatest appeal, and one of the reasons his automated strategies are effective. Because currencies are the source of value for both stocks and commodities, Gelet believes they should be the “primary market” for investors and traders.

The system behind his CTA program, FXV1, returned more than 40% each year from 2005-2008 and was based on a portfolio of uncorrelated systems. He used Trade Robot, a third-party software, to test thousands of simple models and he employed a handful of the best performers. “We created a big portfolio of systems, 90% were garbage, certain types of systems worked,” Gelet says.

Despite the success, the strategy produced a couple of large drawdowns, so Gelet decided to alter his approach and now creates systems based on what he calls “Triangular Arbitrage.” Every trade for every system is based on a correlation analysis of three currency pairs. It uses any group of three liquid pairs and generates six buy or sell signals based on this analysis and then nets them out. He has a risk overlay that gets out on a hard dollar stop and reduces the size of trades if the portfolio becomes correlated.

Gelet feels the new approach is less risky and more sustainable. “We feel this approach is more reliable,” Gelet says. “There [aren’t] any [fundamental factors in the market] that can stop the model from working.”

Gelet’s interest in the markets started when he was five years old and spent hours in his father’s office, with only the Wall Street Journal and financial channels for entertainment. He developed his own bulletin-board system to track the market, a precursor to the Internet sites that would become his bread-and-butter. By the time he was a teenager, Gelet was day-trading his family’s money and continued to do so through the dot-com boom, during which he says, “It was easy to make money. But in 2001, the party was over.”

The “party” started again when new day-trading rules, the introduction of the euro and the advent of trading platforms like MetaTrader created a “perfect storm,” which pushed Gelet to pursue information technology. He then applied IT to forex. “The people who understand technology are really at the center of forex,” he says.

In 2001, Gelet joined forces with Arthur Charloff and Mark Markovic, colleagues at Northwood University, and the trio founded Elite E Services, an electronic boutique brokerage, which is now a global firm, with 17 employees and corporate offices in New Zealand and Nevada. Gelet works from Columbia, South Carolina, where he maintains a small office.

“It’s hard to quantify what we do,” Gelet says. “But the systems are making money.”

Gelet’s aim is for Elite E Services to become “the Microsoft of forex strategies.” And on the way to that goal, he and his partners are planning to open their own forex trading bank.

“We don’t want to be bankers, we want to be traders,” Gelet says. “But who do banks work with? Other banks.”

But no matter his plans, one thing is certain: Gelet’s sense that he belongs in the trading business. Like his systems, Gelet says, “I’m doing what I am sort of designed to do.”

About the Author