The Algorithm

Advanced Concepts
Grid Trading Systems - I
Grid Trading Systems are always in the market and on both
sides of it. The trend is irrelevant.

Grids can capture both 'long' and 'short' trading profits by scaling
in and out of a FOREX pair as it moves up and down in the price
bands.
Grid Trading Systems - II
Grid Systems are typically curve-fit for specific trading
parameters.

Since FOREX pairs move in ‘bands’ this means a Grid will often
work well in the band-size it was designed for, perform poorly in
others.

If a band is much larger than a Grid was designed the system will
‘eat’ until it is forced to liquidate a large position at a substantial
loss.
Grid Trading Systems - III
The Najibi Capital Algorithm is a Grid Trading System with a very
important difference.

The Algorithm uses two unique and proprietary sub-algorithms –

‘speed’ and ‘range’ to determine band size.

Thus, the Najibi Capital Algorithm may perform well in markets

where other Grids falter.
The Algorithm in Action
In September of 2011 the Swiss National Bank made a surprise
announcement which sent the Swissy (CHF) up sharply in a matter of
minutes.

In fact, it was the sharpest move in a currency in over 10 years.

Because the trading band changed so rapidly it was a death

sentence for many Grid Trading Systems.

Let us see how the Najibi Capital Algorithm did in that move…
The Algorithm at Work

• Not only did the Najibi Capital Algorithm avoid the fate of other
Grid Trading Systems – it actually made a profit on this historic
Swiss Franc move.
‘Trading’ and ‘Trending’ Markets
Traditionally, markets have been described as being either in
‘trending mode’ or in ‘trading mode.’

A Trading market is moving sideways.

A Trending market is moving up or down.

These modes are ‘inclusive’ – meaning in at least a general sense

together they will describe any market behavior at any time.
A Trading Market
A Trending Market
Qualitative and Quantitative
The problem? These two terms are qualitative.

For example – A Trading market at one price level may be a

Trending market at another price level.

To study and analyze a market or a trading system’s performance

the information must be quantified.
Trading-Trending Price Levels
Directional Movement and Volatility
A more accurate description of market behavior is derived using the
ME parameters of:

Directional Movement (DM)

and
Volatility (V)

By applying these, we will be able to determine how well the

Najibi Capital Algorithm may be expected to do in the future and
over the long-term.
Directional Movement

DM is the NET change in prices over a period of time.

Volatility - I
Prices seldom move in a straight line up of down – at least for very long.
Even the steepest trending market is composed of small movements in
the opposite direction.

Volatility is the AGGREGATE distance between two price points

including price movements against the trend.

A minimum movement in the opposite direction is determined in

advance for calculation purposes.
Volatility - II
The DM/V Ratio

The ratio between Directional Movement and

Volatility is an important measurement.
The Four ‘ME’ Sectors
This methodology is called MARKET ENVIRONMENTS or ‘ME’
It was originally developed by a trader to test the reliability of a
trading system or method.

We can begin quantifying markets with the four ME sectors:

High DM – High V
High DM – Low V
Low DM – High V
Low DM – Low V

These are inclusive. Any market at any time will fall into one of
these four Sectors.
High DM – High V
High DM – Low V
Low DM – High V
Low DM – Low V
System Performance and ME
Trend systems tend to perform best in High DM markets; worst in High
V markets.

Trading systems tend to perform best in High V markets; worst in High

DM markets.

Ceteris Paribus, the more ‘ME neutral’ a system is – the better.

The Najibi Capital Algorithm is more ME neutral than most types of

trading systems.
The ME Matrix
The ME Matrix takes the four ME sectors to a more specific analytical
level, allowing for the next degree of quantification.

Markets are classified in ME elements.

100 cells move on a graduated continuum from very low DM/very low V
[1-1] to very high DM/very high V [10-10].

Contiguous groups of ME cells are call clusters.

Strong and weak system performance tends to occur in specific clusters.

Trend systems do well in High DM/Low V markets.

Trading systems do well in High V/Low DM markets.

The ME Matrix - II

Every market described – from Low DM and Low V to High DM and

High V.
ME Performance Analysis
There are two Steps to analyzing a system’s performance and
determining its long term sustainability –

The first involves comparing it to the Market footprint.

The second involves analyzing the distribution of trade profits and

losses (scatter) among the 100 ME cells and related clusters using a
number of different statistical measures.
ME Footprint - I
The ME footprint shows the scatter of a market or selection of markets,
over a period of time, distributed across the ME Matrix.

That is, what percentage of time is the market in each of the ME Cells
for the trading record?

How well or poorly did a system do in each ME cell?

Where are the clusters in which it does best – and worst?

How much of the time is the market in the best cells or clusters for a
system – and how much of the time in the worst?

The footprint is calculated for 21 major FX pairs, quarterly, using 5-

minute bars and 12-bar increments.
ME Footprint - II
The FX footprint begins in January 2001 and runs current through December
2011.

There are 22,000,00 ME states in my ME footprint database.

Observe in the ME Matrix:

1) From '1' DM or V to '10' DM or V, values rise then fall. Most of the 'action'
is in the middle.

2) The highest numbers tend to be in the central 50 cells, with some

miscellaneous scatter.

3) The footprint may be viewed by the four sectors or specific clusters of

interest, as well.

4) DM and V may be studied separately and they have their own statistical
characteristics.
ME Footprint - III
ME Footprint - IV
ME Footprint - V
ME Footprint - VI
Because of the length of the sample the FX ME footprint is very stable.
In the past 17 quarters the percentages in each Cell have changed
very little.

There is high statistical confidence the scatter in the FX pairs ME

footprint will not change significantly over time.

Although it varies from time-frame to time-frame, markets tend to ‘trade’

70% of the time and ‘trend’ 30% of the time.
ME Footprint - VII
Comparing a trading system footprint to the Market footprint defines
how reliable the system trade sample is for further testing.

The size of the system's sample is less important than how accurately
it mirrors the Market footprint! This is critically important –

A small sample from a system with a scatter close to the ME

Footprint will be more reliable than a large sample from a system
with a scatter far away from the ME Footprint – irrespective of
whether the trades are real-time or a back-test!
ME Footprint - VIII
This explains why a short back-test or real-time performance may be a
more reliable indicator of ‘things to come’ than a long back-test or real-
time test:

The back-test or system design may be structured to accurately mirror

the long-term Market footprint.

The real-time market may go for months or even years without

accurately mirroring the long term footprint.
ME Footprint - IX
A Gedanken Experiment

Imagine a trading system designed over data of markets sharply

trending…

Sharp trends represent less than 15% of all market environments…

When the markets begin to ‘fill-in’ the footprint with trading markets –
the systems crashes and burns…

An important conclusion from this -------

Curve-Fitting Performance
Law of Trading Systems

“The more a trading system is designed or ‘tweaked’ over a less than

accurate footprint, the worse it will perform when the footprint begins to
‘fill-in’ with the remaining ME elements in real-time.”
ME Footprint and ‘The Algorithm’ – I
'The Algorithm' trade sample - though temporally short - is exceptionally
close to the ME footprint.

This means that extrapolating statistics and expectations will be

relatively reliable; a very important consideration for system viability
over the long term.

Using one measure of deviation, The Algorithm’s footprint lies just 17%
off the footprint. Most systems tested are between 30% and 45% off the
footprint.
ME Footprint and ‘The Algorithm - II
‘The Algorithm’ – ME Analysis - I
The ME footprint confirmed the track-record sample is sufficient for ‘The
Algorithm’.

This means there should be few ‘surprises’ over the long-term in the
algorithm’s performance; it has ‘seen’ all the ME cells.

Next, we can now analyze how ‘The Algorithm’ performed in each of the
ME cells.

To allow multiple systems to be compared, all final performance is set to

+100. Thus, if performance is 150 for a given system all cells are
converted with a ratio of .67.

These preliminary spreadsheets show ‘The Algorithm’ performance as a

function of the market footprint.
‘The Algorithm – ME Analysis - II

Here we see the strongest Cells – In a vertical and horizontal

cluster outward from Medium DM and Medium V.
‘The Algorithm’ – ME Analysis – III

‘The Algorithm’ is profitable in over 75 percent of ME cells! But

there is even better news ---- >
‘The Algorithm – ME Analysis - IV

High DM/Low V cells tend to be the death sentence for Grid Systems.
‘The Algorithm’ uses additional resources (Speed/Range) and does fine!
Conclusions
The Najibi Algorithm separates itself from other Grid trading systems
with its unique and proprietary analytical features of speed and range.

This appears to show itself in its ability to handle high/DM-Low V market

environments which are traditionally a ‘death sentence’ for Grids.

Although it has been ‘real-time’ for only 18 months, the Algorithm’s ME

analysis shows it to be effective in the broadest possible range of
market behaviors.
Digging Deeper

Qualified investors are now offered the opportunity to speak directly with

our Senior Advisors. They have completed extensive analysis of the

Najibi Capital Algorithm using ME and maintains daily and weekly ME

statistics on real-time Najibi Capital Algorithm accounts.