Trading Methodology

Abraham Trading Company’s trading methodology is a systematic approach blending long-term trend following, short-term trend following, short-term momentum and mean reversion strategies in an effort to reduce volatility while maintaining a return target of 20-25%. Each strategy is further divided into sub-systems to facilitate smoother entries and exits. We have also implemented filtering techniques in some strategies to avoid trades with adverse risk/reward characteristics. While the filter’s goal is to capture profits, its selectiveness allows the system to enter markets only during periods when the risk/reward of a trade is heavily in the trade’s favor. It is even possible that if unacceptable risk characteristics exist, the filter could avoid trades with positive profit expectations. The end result is a trading method that has historically provided our investors exceptional returns with low correlation to stock and bond investments.

Research and Modifications

Abraham Trading Company attributes its exceptional long-term performance to superior research methods. All the models tested are robust with very few degrees of freedom/parameters. Many proprietary statistical techniques are examined including analyzing multiple time period subsets, market-by-market as well as sector analysis and correlation, risk/reward analyses, parameter degradation studies, slippage analysis, and drawdown analysis.  Two independent research teams develop and test systems and then trade projects and cross-check all results using different research platforms.  

Experience helps in developing a successful trading system. The most common and most dangerous error made in system development is curve fitting. One thing we have learned over the last 20 years of trading is that curve fitting cannot be understood by theory alone. There are many statistical traps that can only be learned by trading systems real-time. Statistics require many assumptions. It is extremely difficult to know which of these assumptions are valid in the real world until they are actually put into practice in the real world. This takes time. Abraham Trading Company has learned many lessons by comparing more than 20 years of real-time trading to historical simulations.

Many methods commonly accepted by economists, statisticians, and even the CTA community-at-large have major flaws when executed in the real world. This is because the assumptions are valid only in theory. Abraham Trading Company’s success comes from original thinking and a refusal to blindly accept statistical models, economic theories, and even “common wisdom” prevailing in the investment industry. ATC uses no assumptions in research that have not been proven through extensive testing and real-time experience.

At Abraham Trading Company we believe we have simply come up with better techniques. Over the years the markets have become choppier, and many traders’ returns have suffered.  We believe that continuous research is the only viable way to consistently come up with better ideas and better ways to profit in any market condition. 

Salem began his trading career after much research and testing and in August of 1987 Salem implemented his original strategy, a single system trading 21 markets with an average holding period of 3-4 weeks.  He began managing client money in January of 1988.  Over the past 22 years, this original system has evolved as a result of new research discoveries.  Since 2004 our research has focused on incorporating non-correlated systems in an effort to reduce overall program volatility while maintaining our target annual rate of return of 20-25%.  Prior to January 2006 our annualized daily standard deviation was as high as 33.8%.  However, since our modifications in 2006, our annualized daily standard deviation has dropped to 12.1% as illustrated in the chart below.

Risk/Return Analysis

January 2006 - March 2010

Diversified Portfolio

Abraham Trading Company strives to trade the most diversified futures portfolio possible for our investors. Our portfolio contains 59 exchange traded futures markets covering the currencies, interest rates, global stock indices, grains, softs (food and fiber), meats, metals, and energies. Our high exposure to the physical commodity futures (50% of weighted markets traded) add value to both individual and institutional portfolios.