Managed Futures Programs                                   

Company Profile

Account Information

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Investment Philosophy

John J. Lothian & Company, Inc.’s market philosophy is based on the idea that futures prices are efficient and effective tools for identifying aggregate market psychology, behavior and trends. Those identified trends can be exploited for profits.

The specific philosophy of JJLCO’s programs is to attempt to capture sustained market motion through the identification of simple and basic market behaviors. JJLCO’s trading programs may participate in rising or falling market motion. They do not have a directional bias or try to predict future market direction. JJLCO believes there are investment return opportunities in participating in price movements identified by JJLCO’s rules based methodology.

Trading Method

The JJLCO trading method is unique in the managed futures industry. The programs were not created from fitting indicators to historical data; rather by examining markets and trading from a higher perspective. The first overview analysis generated a few basic ideas and goals, which were distilled to produce a generalized set of rules. The end result is a systematic core method that attempts to follow along with the market’s behavior.

The core system attempts to take advantage of trending markets by reacting to what is happening. It does not predict future market direction or try to precisely time an entry point. Instead, the method assumes that the market is in, or will be entering, a congestion period when a position is initiated. Maximum loss calculations are predetermined prior to the opening of a position and assume normal market conditions. Stops are used with all positions to protect against losses and to lock in profits if a trade moves decisively and triggers the appropriate rules. It should be noted, that due to adverse market conditions, stop orders may not be executed at the stop price, which may not limit losses.

The rules relax if a sizeable trend develops, which allows for intra-trend chop without reversing too quickly. The system uses a small set of arithmetic moving indicators as a way to consistently exit, initiate and size positions. Aside from those indicators, all of the system’s decisions and rules are “if-then” constructions rather than mathematical expressions. 

Potential Investment Benefits

An investment with John J. Lothian & Company and JJLCO managed futures programs may provide several potential benefits, including:

Any prospective client should carefully read the Principal Risk Factors on pages 17, 18, 19, and 20 of the disclosure document for a discussion of the potential risks of an investment with JJLCO.

Risk Management

The highest level of JJLCO managed futures program’s risk philosophy is that the proper control of risk is not simply the most important part of a trading program; it is the reason for a trading program’s existence. Profit largely takes care of itself. It is the way that risk and loss are managed that determines the success and survival of any trading program.
In an ongoing analysis of many different trading programs and traders’ behavior over time, one of the most valuable lessons learned is that there is a striking difference between risk management and loss management. Loss management involves trying to avoid losing trades, and analyzing a program’s behavior based on how much money it has lost over time (or through historical testing). Risk management, on the other hand, involves determining how often and how much a program SHOULD lose, and analyzing a program’s behavior or historical test results based on how much it might have lost on each trade, regardless of the actual outcome.

Loss management, if carefully done, may delay an unavoidable collapse and shutdown of a trading program, but it will happen nonetheless. Risk management cannot guarantee a program’s safety, but it can remove the inevitability of it, improve performance over time, and at the very worst provide a predetermined means to shut down a failing program before it has unrecoverable losses. 

JJLCO’s programs employ the following risk management rules and guidelines:

Keep the win-loss ration relatively even. High probability systems have an inherently high instability despite their outward appearance to the contrary. It requires a lot from the world, the market and the trading program to create constantly optimal conditions for profit. Moreover, a program that is already purportedly 95% accurate has very little room to improve on its typical returns.

JJLCO’s program’s choice is to trade a method that can be steadily profitable over time even when it only wins half the time. That leaves plenty of room for even better results when things go better than expected, and provides flexibility to handle substandard market conditions for a longer period of time. The ability to withstand an unusually extended period of bad market behavior is critical for long-term survival.

The method’s trading philosophy considers all trades to be losers when they are established. Because of that assumption, stops are tighter against the market, rather than giving a trade more of a chance to retrace before heading in the “right” direction. We are also unaffected emotionally as traders by the loss because it was calculated at the start, so when losses to occur they are planned events rather than frightening events. This attitude spawns additional healthy practices, such as always measuring a trade’s worth not by where the market is right now, but instead by where the exit stop resides, regardless of the degree of profit or loss currently in the market or the stop. 

Risk per trade is predetermined. As each new trade’s entry point is identified, we also mechanically calculate the maximum normal loss point for the trade, and place a stop into the market when the trade is established. The maximum stop point is determined not by dollar value, but by the relative recent price activity in the market. Fixed-distance stops do not reflect current markets conditions, so we do not use them.
Position size is adjusted to keep the maximum loss stop under a fixed risk ceiling. Based on the amount of money to be lost per contract, each account’s trading volume is adjusted on each trade so that it trades as many contracts as possible while still remaining under a percentage loss. As volatility and danger in the market increases, we reduce the number of contracts traded. As the market narrows, we trade more. If the market’s behavior grows too erratic, rules can trigger to keep the program out of the market until the volatility returns to a more normal level.

Monitoring system performance is done on a qualitative as well as a quantitative level. As each trade progresses and closes, we keep a close eye on whether the method is behaving as expected. We expect losses and gains to be both within a normal range, and we expect the system to win and lose according to specific templates. Risk management therefore encompasses not only trade-by-trade results, but also the system’s performance as a whole against a behavioral benchmark.

Send mail to johnlothian@johnlothian.com with questions or comments about this web site.
Last modified: 08/29/08

Disclaimer: The John Lothian Newsletter, Environmental Markets Newsletter, and Frontier Markets Newsletter are products of John J. Lothian & Company, Inc. The opinions expressed in the John Lothian Newsletter and Environmental Markets are strictly those of its editors. It is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is obtained from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Security futures are not suitable for all customers.

Futures and options trading involve risk. Past results are not necessarily an indication of future performance.

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