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THE PARADIGM SHIFT TRADING SYSTEM

I’ve been a trend-follower in commodities all my trading life. But about 2002, I started to become uncomfortable with the way my trend-following trades progressed. In 2005, I discovered that the volatility in the commodity markets had increased 40 percent above pre-2000 levels. I compensated by adding volatility filters to my trend-following strategies which inhibited trading when volatility was too high. This worked well for a few years, but I started to get uncomfortable again over the last few years. The following charts are equity curves of the two systems I traded, the Aberration Strategy, and Clipper. The equity curve is for all domestic commodities with a one-lot taken per trade. A slippage/commission deduction of $50 was taken from each trade.


Aberration on Domestic Basket of 45 Commodities, One-Lot Per Trade

Clipper on Domestic Basket of 45 Commodities, One-Lot Per Trade

The equity curves show that both systems have been essentially flat since the start of 2011. Now I’m not the only one questioning what’s been going on the last 2.5 years. Brokers I work with are reporting that nothing is working and a lot of systems are at their all-time max draw-down marks. Perhaps it’s just a period void of trends, but I’m not comfortable with that explanation, so I looked deeper.

What I found stunned me. I am now confident when I say trend-following is dead in the domestic commodity markets on daily-bar data. Here’s one of a myriad of charts I generated trading commodities in a way other than trend-following:

A New Paradigm Approach on a Domestic Basket of 45 Commodities,

One-Lot Per Trade

Note that from 1990 until May of 2011 the equity curve went choppily down to a max draw-down of about $580,000. This is the period trend-following worked, while this approach didn’t. Then look at the spectacular performance from May 2011 until mid-October 2013. The entire $580,000 was made back plus another $100,000. That’s about $270,000 per year across the 2.5 years. I’ve never seen a trend-following system make that much money so fast across the domestic basket. Clearly a new paradigm is in place. It started in May 2011 when the trend-following paradigm ended.

Paradigm Shift Details

The strategy enters a trade on a stop when there is a high probability of a strong move in that direction. Signals are given when CSI end-of-day data becomes available, between 8:30 and 9:00 PM EST. The trade risk in dollars is given with each order. If the risk is too high for your account size, bypass the trade. Trades are exited when the probability of a move in the trade direction lowers, or when the stop value is exceeded. Exit is done on the next open.

Paradigm Shift Performance by Commodity

The following tables show the strategies’ trade results from May 2011 through December 2013. These figures were generated using continuous, back-adjusted contracts. A $50 slippage and commission deduction was taken from each trade.

 

Paradigm Shift on Grains (May 2011 - Aug 2014)
Commodity
Winning Trades
Losing Trades
Total Profit
Profit-per- Trade
Corn
10
7
6050
355
Oats
3
3
750
125
Soybeans
14
14
10562
377
Bean Meal
18
11
21400
737
Bean Oil
3
2
500
100
Wheat
6
21
-14163
-525
KC Wheat
9
12
-850
-41
Rough Rice
4
5
820
91
Totals
66
74
24595
175

 

Paradigm Shift on Meats (May 2011 - Aug 2014)
Commodity
Winning Trades
Losing Trades
Total Profit
Profit-per- Trade
Live Cattle
3
3
360
60
Lean Hogs
5
4
1339
148
Feeder Cattle
7
7
6337
452
Totals
14
14
5662
202

 

Paradigm Shift on Softs (May 2011 - Aug 2014)
Commodity
Winning Trades
Losing Trades
Total Profit
Profit-per- Trade
Coffee
17
21
24537
645
Cotton
15
10
18860
754
Lumber
12
9
19740
940
Cocoa
4
7
-1740
-158
Sugar
2
4
-687
-115
Orange Juice
9
5
7032
502
Totals
57
56
64314
569

 

Paradigm Shift on Metals (May 2011 - Aug 2014)
Commodity
Winning Trades
Losing Trades
Total Profit
Profit-per- Trade
Copper
15
18
4862
147
Palladium
21
18
41825
1072
Silver
18
13
152365
4915
Gold
18
15
34820
1055
Platinum
19
10
47105
1624
Mini Silver
18
13
28772
928
Mini Gold
16
15
8162
263
Totals
123
101
316244
1411

 

Paradigm Shift on Energies (May 2011 - Aug 2014)
Commodity
Winning Trades
Losing Trades
Total Profit
Profit-per- Trade
Crude Oil
15
11
36869
1418
Natural Gas (mini)
1
1
-1138
-569
Heating Oil
22
13
77840
2224
Reformulated Gas
15
21
41434
1150
Mini Crude
18
14
16262
508
Totals
71
60
171269
1307

 

Paradigm Shift on Currencies (May 2011 - Aug 2014
Commodity
Winning Trades
Losing Trades
Total Profit
Profit-per- Trade
Japanese Yen
11
16
-6563
-244
Swiss Franc
12
15
10525
389
Canadian $
11
5
3530
220
British Pound
6
11
-9750
-574
Dollar Index
4
2
4895
815
Mexican Peso
2
0
2410
1205
Australian ($)
11
8
9730
512
Euro Currency
18
9
38725
1434
Totals
75
65
55065
393

 

Paradigm Shift on US Financials (May 2011 - Aug 2014)
Commodity
Winning Trades
Losing Trades
Total Profit
Profit-per- Trade
30-Year Bond
14
17
17012
548
10-Year Note
4
3
3400
485
5-Year Note
0
0
0
0
2-Year Note
0
0
0
0
Eurodollar
0
0
0
0
Totals
18
20
20412
537

 

Paradigm Shift on Stock Indices (May 2011 - Aug 2014)
Commodity
Winning Trades
Losing Trades
Total Profit
Profit-per- Trade
S&P 500 (mini)
15
10
25325
1013
Midcap 400 (mini)
17
22
22220
569
Nasdaq 100 (mini)
10
12
-20
-1
Dow Jones (mini)
12
10
11630
528
Russell 2000 (mini)
24
12
66210
1839
Nikkei
12
10
2930
133
Totals
88
75
127922
784

 

Paradigm Shift Group Summary (May 2011 - Aug 2014)
Commodity
Winning Trades
Losing Trades
Total Profit
Profit-per- Trade
Grains
68
74
24595
175
Meats
14
14
5662
202
Softs
57
56
64314
569
Metals
123
101
316244
1411
Energies
71
60
171269
1307
Currencies
75
65
55065
393
US Financials
18
20
20412
537
Stock Indices
88
75
127922
784
Totals
512
465
785486
803

This breakout shows many differences from typical trend-following performance before the Paradigm Shift:

• There are more winners than losers. Trend-following strategies typically average between 30 and 40 percent winning trades.

•  The stock indices trade very well in the new environment where trend-following strategies used to be little better than break-even on the stock indices.

•  Though a very small sample, the meats perform surprisingly well. They were the worst group for trend-following strategies.

• The profit-per-trade of over $800 is larger than any trend-following strategy I’ve ever seen. Additionally, trades average only 12 trading days per trade while longer-term strategies like Aberration would hold for 2 months on average.

There is another huge difference: the short side makes about twice as much as the long side. Before the paradigm shift, trend-following commodity systems usually made about twice as much on the LONG side as they did on the short side.

Though the timeframe that the Paradigm Shift has been in effect is only 3.25 years so far, the results are still impressive. The average profit per year across the basket is about $240,00. Each trade averages about $800. And across all trades, the system wins about 53 percent of the time. Additionally, the trades last only 13 trading days on average.

These results were generated using back-adjusted continuous contracts. A $50 slippage/commission deduction was made on each trade. The following CFTC notice on hypothetical results should be noted.

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.

TRADING THE STRATEGY ON SMALL ACCOUNTS

The strategy works across the commodity groups. A way to use this characteristic is to trade a diversified portfolio of commodities with multi-group representation that suits your account size. This strategy minimizes exposure in correlated commodities which tend to make winning trades at the same time, and losing trades. Diversification smooths the equity curve which results in lower drawdowns. Since risk management should be the primary aim of every trader, diversification is an investment tool that should be used where possible. Additionally, use the trade risk given with each signal to stay away from trades with excessive risk for your account size.

The following tables show performance when the number of trades in each group is constrained, and the trade risk threshold is restricted. The basket of commodities included in the analysis is the group that has been profitable to date.

Small Account Performance when a Max of 1 Trade is on in each Group versus Entry Risk Threshold
Max Risk Threshold
Average Annual Return
Max Draw-Down
Average Max Draw-Down
N/A, All Trades
$72,881
$45,225
$28,100
$1,250
$15,172
$9,307
$7,309
$1,500
28639
11528
9412
$1,750
$37,631
$12,992
$11,148
$2,000
$37,816
$27,229
$15,774

 

Small Account Performance when a Max of 2 Trades is on in each Group versus Entry Risk Threshold
Max Risk Threshold
Average Annual Return
Max Draw-Down
Average Max Draw-Down
N/A, All Trades
$167583
$40,578
$36,619
$1,250
$17,553
$8,789
$8,288
$1,500
$30,201
$16,287
$12,505
$1,750
$67,097
$12,114
$11,093
$2,000
$69,919
$22,369
$16,100

 

Small Account Performance when a Max of 3 Trades is on in each Group versus Entry Risk Threshold
Max Risk Threshold
Average Annual Return
Max Draw-Down
Average Max Draw-Down
N/A, All Trades
$205,989
$49,542
$43,470
$1,250
$18,477
$8,789
$8,288
$1,500
$33,790
$16,287
$13,347
$1,750
$68,333
$17,227
$14,251
$2,000
$78,626
$19,628
$16,015

As the tables show there is a good trading solution in terms of return and risk for smaller accounts. It is recommended you select the max draw-down you're willing to accept for your account size and determine if the return is worth that amount of risk for your trading makeup.

TRADING THE STRATEGY ON LARGE ACCOUNTS

For large account fixed risk sizing is recommended. In this money management approach, a fixed percentage of equity is risked on each trade. It is implemented by taking the fixed percentage of account equity on the day of the trade and then using Paradigm Shift’s trade risk to determine the number of contracts that should be traded to risk the desired amount. For example, if account size is $250,000 and the fixed percentage the trader has decided to risk is 3 percent, $7,500 could be risked on a trade signal (0.03 multiplied by $250,000). If the trade risk for a signal is $1,400 (distance from entry to the catastrophic stop level converted to dollars), 5 contracts would be bought or sold on the signal (fractions are rounded down). This example illustrates that a sizeable account is required to implement this conservative money management strategy, otherwise the fixed percentage of equity will be too small to support even a one-contract trade.

The following tables show performance when the number of trades in each group is constrained, and the trade risk threshold is restricted. The entire basket of 45 commodities was included in the analysis.

Fixed Risk Performance

Risked Per Trade

Average Annual Compounded Return
Max Draw-Down
0.5%
39.0
13.8
0.75%
67.2
21.6
1.0%
100.2
28.9

Again, the ratio of return to draw-down is outstanding.

 

DISCLAIMER

The commodity trading futures performance reported on this website is hypothetical. It is based on the use of computerized system logic on CSI data. Trading costs (slippage and commission) have been accounted for by deducting $50 from each trade. Please note the following Commodity Futures Trading Commission disclaimer on hypothetical trades:

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.

 

YOU'LL LOVE THE DIVERSITY AND EASE OF TRADING

• Non-Disclosed. The trading logic is not disclosed.

•  End-of Day System. You don't have to sit in front of a computer to trade Paradigm shift. It uses daily bar data for trading decisions. You will know before the open of trading whether there is an order that day. You can place all orders before the market opens. Once the orders have been placed, you don't need to monitor the market the rest of the day.

•  Money Management. Our systems have easy to understand money management rules. You will know exactly what to trade, and in what size each day.

Easy to use software. You will have Windows-based software to generate daily signals and to back-test performance. You can gain confidence in the robustness of the system by doing your own back-testing with data we provide. For on-going trading signals, you can subscribe to a low-cost data vendor and get the trading signals in less than 5 minutes. You don't have to use the software if you don't want. 

•  Trade Station Code. For those who use Trade Station for trading and back-testing, we provide EasyLanguage code for that platform.

YOU CAN HAVE AN EXPERT TRADE THE SYSTEM FOR YOU

In my seminars, I stress that most traders fail due to an inability to execute their strategy as they planned. Even with great systems, traders throw away their edge by letting their emotions over-rule their plan. I have a broker who will execute the system for you at a rate only slightly above the discount rate. This brokers is highly experienced with Paradigm Shift routinely it for clients like you. So if you purchase Paradigm Shift, you can open an account with the broker and have confidence that they are being traded expertly by a registered professional.

GUARANTEE

I don't guarantee future performance. I'm registered with the Commodity Futures Trading Commission, CFTC, as a Commodity Trading Adviser, CTA, and am prohibited from doing so. In practice, I wouldn't guarantee future performance anyway. There's no way to be sure a strategy will perform indefinitely into the future. What I can, and do, guarantee is that the past performance claims I make for Paradigm shift are true. Every number on this website comes from a computer using CSI end-of-day data. If you purchase the system your numbers with CSI data will match mine, that's the guarantee. If they don't, I'll give you your money back.

I've sold Aberration, and now Paradigm shift, to the public for over 20 years. In all that time no-one has ever claimed my numbers are "fudged" or inaccurate.

WHAT YOU GET

When you purchase Paradigm shift you will receive:

•  A detailed trading manual which shows past performance on individual commodities and portfolios, explains the money management used for both small- and large-account tradfers, and covers software installation and operation.

• Easy-to-use Windows-based software that lets you back-test commodity and portfolio performance, perform money management analyses, and generate daily trading signals when mated with end-of-day data.

•  Trade Station code.

•  Full Support. We will answer trading questions and technically support the software.

PRICE

Paradigm Shift can be purchased for the reasonable price of $1,995. You can orderby credit card through a secure server by clicking Subscribe/Order on the navigation panel. Or, you can send a check to:

TradeSystem, Inc.

11276 Ballantyne Crossing Ave.

Charlotte, NC 28277

For questions, feel free to call us at our toll-free number: 800-372-3942

 

 
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