I-MASTER
INDEX TRADING SYSTEM

The following breakout shows the results of trading an E-Mini with the system on the S&P, NASDAQ, Russell 2000, and S&P Midcap indices since 1996:

If the max drawdown of $11,815 for the S&P is doubled, and a margin requirement of $4,500 is used, about $30,000 would be the requirement to trade one E-Mini. In that case the average profit of $19,516 would yield about a 65 percent return, but if a $12,000 drawdown were sustained, the drawdown would be 40 percent, a tough drawdown to trade through for most individuals.

Due to relatively low correlation between the two, it is better to add a NASDAQ E-Mini when account equity grows rather than add another S&P E-Mini. The following is a year-by-year breakout of the returns and drawdown:

Note that the max drawdown of $13,208 is only about $1,000 higher than the max drawdown for the NASDAQ E-Mini alone. In this case, combining a doubling of the max drawdown and a margin requirement of about $9,500 to trade both E-Minis yields an equity requirement of $36,000 to trade both. If this is conservatively rounded up to $50,000, a return of over 100 percent is attained, while the average max drawdown would be about 20 percent ($10,232/$52,402).

As profit accrues, Russell 2000 and S&P Midcap E-Mini contracts can be added, but it is a good idea to cut back risk as each additional E-Mini contract is added; a 30 percent drawdown may be sustainable for the trader on a $30,000 account, but on an account that has been carefully traded up to $100,000, a $30,000 drawdown would be devastating to most traders.

The large account investor can take advantage of advanced money-management techniques to predefine his risk and reward outcomes. One of these money management strategies is to risk a fixed percentage of equity on each trade. This strategy allows account equity to grow at an exponential rate, while the absolute risk the investor faces stays the same. As an example, an investor with a $1,000,000 account might decide to risk 2 percent of equity on each trade. The first trade will be undertaken with a risk of $20,000 (2 percent of $1,000,000). But when the account doubles to $2,000,000, the amount risked is $40,000. Thus as the account grows, more money is risked on each trade, but the percentage of equity risked is always the same. The mechanics of risking the $20,000 are to divide that amount by the risk of trading a one-lot to determine the number of lots bought or sold. If the trade risk for a one-lot was $10,000, then two contracts would be bought or sold. The trade risk for a one-lot is the distance of the stop from current price. If for example, I-Master gave a signal to go long and the stop was 10 points below the entry in the S&P 500, then the risk would be $2,500 (10 points times $250 dollars per point). So in that example, $2,500 would be the one-lot trade risk.

The following graph shows the return and risk outcomes for the large-account investor when a variety of risk percentages are tested. The S&P, NASDAQ, and Russell 2000 were all traded. An initial starting equity of $1,000,000 is assumed. The results are for January 1996 through the August 2002.

These results show that the investor can achieve almost any return he desires, if he is willing to take the accompanying risk. For example an investor can risk 4 percent of equity on each trade, and average just over 100 percent per year, but he will experience a maximum drawdown of about 18 percent each year, on average.

NOTICE: “HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.”