Thank you for your interest in the Relativity Trading System. After reviewing the following article, I am certain you will agree that we have created something unique.
My name is Dean Hoffman. I am now in my thirtieth year in the commodity business, the last twenty-three of which I have invested studying and developing specialized commodity trading systems.
In 2001, I created a financial software company dedicated to commercial trading systems. One of those systems has done so well that the Futures Truth Company, an independent trading systems evaluator, has decorated us with their prestigious Top Ten Trading Systems of All Time award—not once, but twice.
My experience ranges from owning a commodity futures brokerage firm at the Chicago Mercantile Exchange to my current position as a licensed Commodity Trading Advisor. I am the founder and owner of two trading companies, R Quant Systems LLC and R Quant Capital LLC. Using my proprietary trading systems, I trade around seven-figure accounts in the futures market daily.
Many years of experience are what helped me refine the ideas that I am about to share with you.
Trading System Basics
In this section, we are going to explore some fundamentals of commodity trading. Experienced traders may want to skip ahead to the section on Relativity.
The first basic idea that needs to be understood is trends. Trends are the basis of all trading profits. Prices must “trend” higher from where a trader bought, or they must “trend” lower from where he sold to make a profit. Some may argue that they are “counter-trend” traders, but these trades need a trend in price (however short-term) to make a profit.
When you think about it, trends are everywhere. Temperatures gradually trend from warm into cold as winter approaches. The demand for gasoline gradually trends higher during the summer driving months. Ground moisture trends from moist to dry when a drought approaches and interest rates trend from high to low or low to high over extended periods, and so on.
All these events, whether natural or unnatural, can create sustained price trends in the futures market, and it is from these trends that we can try to profit. Systems like these get referred to as “trend following systems.” Calling them “trend following systems” is correct because these systems cannot and do not try to predict trends. Instead, they jump on board with the trends once they have begun. Commodity markets have empirically shown that they often trend well.
The difference among traders is how they decide the beginning and end of a trend. A trader may define the starting point of a trend as something as basic as a slight price change towards a moving average. As an example, some traders might use a rising moving average of prices as a signal that the market is ready to go even higher. Counter-trend traders, on the other hand, might use the same signal as a sign that the market is overbought and getting ready to head lower. Either approach is possibly correct depending on their exits. The question is how we can code these trading approaches into profitable trading systems.
Position Sizing and Money Management
A trader must also have an excellent position sizing and money management plan with entry and exit methods. Traders with entry and exit points that are 90% accurate, and who risk nearly everything on every trade will later lose all their money. Inversely, a system with an accuracy of just 10% but using good money management could do well.
Traders need to know precisely how much of their account to put at risk on any trade. How many positions to buy or sell when there is a signal is also extremely important. An expert system should provide traders with all this information.
Definition of a System
A system can get defined as a combination of entry and exit techniques with an accompanying money management plan. Some traders are content to trade one system while others may combine various systems.
The final ingredient is proper trading psychology. It does not matter how outstanding a trader’s systems are, if he cannot tolerate the heat during the inevitable drawdown periods, he will lose. , if he gets too ecstatic during winning periods, he will also likely lose.
The key is consistency and the ability to stick to a system through good times and bad. A trader must have confidence in his approach, and extensive (and proper) testing can help. Testing can ultimately help build proof that what a trader is doing works.
In short, traders need an edge. This edge should consist of:
1. Proven entry and exit techniques
2. A proven position sizing and money management plan
3. Proper trading psychology
Although it would be easy to expand each of these three points into a whole book of its own, my purpose here is to give traders a high-level summary.
The Relativity Trading System
Relativity is a combination of five trading systems. Trading five systems together will give a trader much greater diversification than trading one. All these systems are trend following, yet they also incorporate parts more inclined toward counter trend following. This diversity adds to diversification.
These five systems communicate and trade together as one integrated unit. For example, if one system has already invested heavily in Japanese Yen, the other four systems know not to add more trades in that market. Doing so would not add diversification but instead, raise the risk for the same trading idea.
The Relativity Trading System uses more than the basics of price direction as its method to generate signals. Relativity starts by using sophisticated pattern recognition techniques that better enable it to identify the best risk-to-reward entry points. It then uses a series of various exits to limit risk and lock in profits. Many customers find this exit method pleasing; the reason is that, unlike many systems that follow trends, the Relativity Trading System tends not to give much profit back after a large move in its favor.
One unique part of the Relativity Trading System is its dynamic portfolio logic. Unlike most systems that predefine a smaller portfolio to trade, Relativity trades every commodity sector, and it does this while maintaining low minimum account size requirements.
All the markets are ranked into percentiles daily. The Relativity system then narrows its list to a few markets that have the highest relative potential. The result of this practice is that, while not many markets are on its radar at any given time, that small list changes depending on where the best opportunities lie. One of the greatest benefits is that traders do not have to worry that the best trends will occur in markets that they do not trade!
Money Management and Position Sizing
The Relativity Trading System also handles position sizing and money management. It manages how many contracts to enter when a trader gets a trading signal because various futures contracts have various volatilities and it would not be proper diversification to trade them all in equal numbers. If a contract, for example, tends towards high-volatility, a trader should trade fewer of those than another whose volatility is lower. The Relativity Trading System uses a trader’s account size to decide the proper position size for each trade he enters. Frequently the correct position size is none, and there are four reasons for this:
The first reason is whether the trade occurs in a market not strong enough in rank to be in the dynamic portfolio.
The second reason is whether, given the account size, the risk in the trade is too high.
The third reason is whether, given the current positions, there is already enough or too much risk held in a given sector.
The fourth reason is whether, given the current trades, there is already enough risk across all the current positions in the portfolio.
Relativity does not try to risk more than 1.5% of traders account size in any trade. It will also not risk more than 5% of his account in any sector. Let’s suppose, for example, that a trader buys crude oil for his account. If the risk in that trade amounts to 5% or more, Relativity will not add new trades in any markets highly correlated such as unleaded gasoline.
Relativity also will not try to risk more than 10% of a total account at a time. If every trade a trader is in simultaneously gets stopped out, the total should not constitute more than about 10% of the equity of the trader’s account. Once the risk level either reaches or goes past this 10% level, Relativity will reject new trades and return a position size of none.
(* see risk disclosure on limiting risk)
In short, the Relativity Trading System combines all the parts that I think matter most to a trader becoming successful trading commodities. Relativity diversifies not only across many winning systems but almost every commodity market. Position sizing and money management create a system that should not only meet but also exceed a traders’ expectations.
*Risk percentages cannot be guaranteed, periodic market conditions could cause traders stop loss orders not to get filled at the specified prices.
President, R Quant Systems LLC
Commodity Trading Advisor