Quantitative Trading System For The E-mini S&P By Capital Evolution LLC

Aurora Pro is a quantitative trading strategy designed to trade the E-mini S&P futures market. The system employs daily mean-reversion and breakout trading to produce enhanced absolute and risk adjusted returns.!The system uses the following key design principles:

1. Market regime switching 2. Volatility adaptive parameters 3. Both symmetrical and non-symmetrical trading logic !

Aurora Pro has performed well on both out-of-sample historical data and on live market data. The system is designed for the retail trader who wishes to control risk while maximizing returns. This is accomplished by utilizing Aurora Pro’s built-in position sizing model. The software is written in EasyLanguage and will execute on the TradeStation platform. This document will provide you with both historical performance results as well as results generated on live market data.

Aurora Pro v1.11 For TradeStation 9.1 June 2014

AURORA PROAu

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Aurora Pro is really two trading systems combined into one. The system utilizes both a Mean Reverting strategy and a Breakout strategy. Each strategy can be traded individually or in parallel. Utilizing both strategies allows Aurora Pro to enter short-term day trades or hold trades over several days. Having two unique trading strategies helps produce a robust, diverse and effective trading system. !All trades are executed on a 5-minute chart while most of the trading signals are generated from a daily chart. Thus, Aurora Pro uses multiple timeframes to both open new trades and to manage those trades. !

Common Attributes Between Both Strategies Include: !• Uses two timeframes (5-minute chart, daily

chart) • All trades executed on a 5-minute chart • Long only • Trades the E-mini S&P

Together these two trading strategies and their trading principles lead to Aurora Pro demonstrating robust performance over the past 12 years. Utilizing two trading strategies helps smooth the equity curve as it brings diversification to your trading.

Two Strategies In One Trading System Mean Reversion and Breakout

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This strategy utilizes volatility adaptive profit and stop loss targets, and symmetrical trading logic to profit in both bull and bear markets. There are no user input parameters to modify. !This strategy makes no distinction between bull or bear markets. The breakout level at which a new position is opened is based upon the prior day’s price action on the daily bar chart. A stop loss is also determined based upon the same prior day's price action. This results in both a dynamic profit target and stop loss that adapts to the ebb and flow of market volatility. Breakout trading systems on the E-mini S&P are often more difficult to trade since the market tends to exhibit a mean reverting bias. However, utilizing both a simple trend filter and momentum filter applied to the daily chart, Aurora Pro is better able to capture those days when a strong bull trend will take place during the regular trading hours. !The breakout strategy is ideal for clients with small trading accounts such as $10,000. The breakout strategy utilizes tight stops and lets profits run as it attempts to capture break-away markets.

Auro

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A Day-Trading Strategy

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Utilizes market-regime-switching, volatility adaptive profit targets and nonsymmetrical trading logic to profit in both bull and bear markets. Several input values are available for the user to modify. !On the macro level Aurora Pro will first determine the overall market regime: bull or bear. Market-regime-switching allows Aurora Pro to adapt its trading to the market regime. The behavior of market participants during bear markets can be significantly different than the behavior seen during a bull market. Thus, Aurora Pro will modify its trading parameters to account for the change. This ability results in nonsymmetrical trading parameters to take advantage of the psychology difference of market participants during the two market regimes. Finally, market volatility is taken into account when determining the profit target which allows Aurora Pro to adapt to a changing market. !The E-mini S&P futures market has demonstrated mean reversion characteristics for the past decade. Our own studies published have supported this behavior in the stock index market. Most notably we have demonstrated that buying into short-term weakness during an overall bull market outperforms buying into short-term strength. Strong bullish moves in the stock index market are often followed by sell-offs, not continued strength. On the other hand, sell-offs are often followed by sudden surges in buying. Aurora Pro attempts to capitalize on this behavior by monitoring the daily price activity for sharp pullbacks which are then purchased in an attempt to profit on the sudden “snap back” to the up-side. We define a bull market when price is above its 200-day Simple Moving Average (SMA).

The Mean Reversion Strategy A Swing Strategy

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Position Sizing & Risk Determine Your Profit Potential vs. Risk Tolerance

Aurora Pro is capable of two different methods of position sizing. First, is a fixed number of contracts. Second, is a Percent Risk Model

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POSITION SIZINGAu

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Fixed Number of Contracts Per Trade !The default configuration for Aurora Pro is to trade a single contract per trade setup. This simply means for each trade the same number of contracts will be traded. While the default setting is one contract, you may trade as many contracts as you wish.

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The Percent Risk Model is based upon two important factors. First, the maximum dollar amount you are willing to risk per trade as a percentage of your account equity. Next, is the starting size of your trading account. For example, a 2% risk model indicates you are willing to risk no more than 2% of your account on any given trade. This is a common position sizing model. Keep in mind a position sizing model is critical for long-term equity growth and maximizing returns.#

It is advised you study position sizing as an important factor in your trading. Such a topic is beyond the scope of this manual so if you are not familiar with position sizing, please perform an Internet search on the topic.#

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How Big Does My Account Need To Be? !This is a good question. To answer this question we need to know...#

• What is your account size is.#

• What you’re willing to risk per trade.#

• What is the stop loss value for Aurora Pro. #

Aurora Pro currently uses a variety of stops and some of those stops are dynamic. Analyzing the historical performance of Aurora Pro for the past 12 years we can estimate the average stop loss value to be around $300. However, we know the stop loss value for the Mean Reversion strategy is hard coded at $500. So we should use the larger value of $500. Given this information we can easily compute the account size required to trade this system. Say you wish to risk no more than 2% of your account on any given trade:#

Let X represent the account size required.#

2%(X) = $500X = $500/ .02X = $25,000#

In this example, you should have at least $25,000 in your trading account to trade the Mean Reversion strategy.If you have a smaller account, you could simply trade the Breakout strategy only. The Breakout strategy risks far less dollars per trade. Based upon the historical performance the average losing trade for the Breakout strategy is about $200. Using the same formula above we can estimate what our account balance should be if we decide to only trade the Breakout strategy.#

2%(X) = $200X = $200/ .02X = $10,000#

In this example, you should have at least a $10,000 trading account if you are only going to trade the Breakout strategy.#

One of the leading causes for people to fail at system trading is not being properly funded. Be sure you have a properly funded account based upon a realistic risk level.

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Aurora Pro Live & Historical Returns In-Sample, Out-of-Sample & Live Returns

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PERFORMANCEAu

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Unless otherwise stated, all accounts assume $25,000 starting equity. $30 round trip fee is deducted for both slippage and commissions.

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Aurora Pro Live Results - Single ContractStarting Equity: $25,000 Position Sizing: 1 contract per trade Test Period: July 24 2012 through April 28, 2014 !These are live trades, not back tested results. These are tracked in the Aurora Pro Member’s area.

CAGR

15.32%!RETURN ON CAPITAL

28.7% !BUY AND HOLD RETURN

39.9%

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Aurora Pro Live Trades

$25,000

$27,000

$29,000

$31,000

$33,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47

Equity Linear Trendline

PerformanceExpectancy 0.410Expectancy Score 4,059Net P&L $7,168Return% 28.67%Trades 48Average Profit/Trade $149.33Median Profit/Trade -$68.75Wins 23Losses 25%Wins 48%Average Win $707.88Average Loss -$364.54

Aurora Pro Backtest - Single ContractStarting Equity: $25,000 Position Sizing: 1 contract per trade Commissions & Slippage: $30 deducted per trade Test Period: January 1, 2000 through December 31, 2013

ANNUAL RATE OF RETURN

6.42%!RETURN ON CAPITAL

236% !BUY AND HOLD RETURN

22.8%

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Aurora PerformanceNet P&L $59,070

Number of Trades 421

Winning Trades 226

Losing Trades 195

%Win 54%

Risk Per Trade $291

Average P&L per Trade $123

Average Winning Trade $509

Average Losing Trade -$288

Expectancy 0.54

Expectancy Score 36.79

Aurora Pro Backtest - Single Contract

$0

$7,500

$15,000

$22,500

$30,000

$37,500

$45,000

$52,500

$60,000

1 23 45 67 89 111 133 155 177 199 221 243 265 287 309 331 353 375 397 419

Aurora Pro Trading 1% RiskStarting Equity: $25,000 Position Sizing: 1% Risk per trade Commissions & Slippage: $30 deducted per trade Test Period: January 1, 2000 through December 31, 2013

ANNUAL RATE OF RETURN 15.19%!

RETURN ON CAPITAL

705% !BUY AND HOLD RETURN

22.8% !

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Net P&L $176,333

Number of Trades 421

Winning Trades 226

Losing Trades 195

%Win 54%

Risk Per Trade $789

Average P&L per Trade $665

Average Winning Trade $1,936

Average Losing Trade -$936

Expectancy 1.45

Expectancy Score 98.48

Aurora Pro Backtest - 1% Risk

$0

$25,000

$50,000

$75,000

$100,000

$125,000

$150,000

$175,000

$200,000

1 23 45 67 89 111 133 155 177 199 221 243 265 287 309 331 353 375 397 419

ExpectancyAu

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The next chart below is an expectancy analysis based upon trading one contract per trade. Aurora Pro’s expectancy value is 0.54. What this indicates is over the life of the trading system, a net profit of $.54 is generated for every dollar placed at risk. The expectancy score is 16.32 and provides an overall objective system performance value that can be used to compare the performance of other systems.

Risk Per Trade Scatter Plot

0

125

250

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500

0 108 215 323 430

Expectancy 0.54Expectancy Score 16.32

P&L Confidence IntervalAu

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The chart below is a confidence interval analysis of the P&L. The results on this page were based on trading a single contract. The confidence interval is $49.86 which is used to produce an upper and lower bands that remain will within the profitable region. You will also find the t-score computation comes to a respectable 1.97. A t-score above 1.6 is often considered favorable.

Confidence IntervalConfidence: 0.95

t-score 1.97Confidence Interval: $ 49.86

Upper Band: $190.17Lower Band: $ 90.44

Number of Trades 421Average Trade P&L $ 140.41 SD Average Trade P&L $ 520.52

P&L Scatter Plot

-750

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0 105 211 316 421

Monte Carlo Simulations And Equity Confidence

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In an attempt to determine how likely Aurora Pro will perform into the future based upon random variation of all historical trades, a Monte Carlo simulation can be used. A Monte Carlo simulation (or Monte Carlo Method) is a computational method that uses repeated random samples take from our historical results and uses these to generate possible outcomes. In this case, we provide the historical trades of Aurora Pro as input and the Monte Carlo simulation generates thousands of possible outcomes and computes the likelihood of such an

outcome. After thousands of iterations the rate of return is evaluated at specific probabilities. #

Below is the result of our simulations. The equity curve in blue is a typical looking equity curve generated by Aurora Pro trading a single contract. The Monte Carlo process then generated two bands colored in red (5% confidence) and green (95% confidence). These represents the best case and worse case scenarios of the equity curve.

Increasing Return With Position SizingAu

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How much you risk per trade determines both your total return and your maximum drawdown. The following table is a summary of 5,000 Monte Carlo iterations over the entire historical performance of Aurora Pro. The trading system’s default settings were fed into the Monte Carlo simulator which included a starting account size of $25,000 and $30 deducted for both commissions and slippage per trade per contract. I then tested different percent risk values for position sizing. The percent risk model for position sizing determines the number of contracts to trade based on a percentage of your total trading capital. #

Each Monte Carlo run has a confidence level of 95%. In other words, for each run 95% of the 5,000 iterations fell within the given performance parameters. The Return column is the total return on the initial investment. Max Drawdown column is the maximum peak-to-valley closed trade drawdown expressed as a percentage decline from the prior highest peak in equity. The Net Profit column is the final accumulated profit.#

%RiskReturn

%

Max Drawdown

%Net Profit!

$

1.00 518 14.7 129,555

1.25 891 17.4 247,977

1.50 1,513 21.0 403,205

1.75 2,516 24.2 654,075

2.00 4,025 27.2 1,006,330

A drawdown of 17.4% may be too much for you to emotionally handle. Decreasing the percent risk to 1.0% pushes maximum drawdown to 14.7%. You have to ask yourself, “what drawdown can I emotionally handle?” In summary, an “ideal” percent risk value will most likely fall between 1.00-1.50% depending upon your personal risk tolerance.#

Of course there is nothing stopping you with starting out at 1.00% risk and increasing that value over the years as your account and confidence grows. #

Knowing this information will help determine if you want to trade such a system. Likewise, if you are trading this system and find yourself in a drawdown the above information can help you with your expectations of drawdown and consecutive losers. Drawdowns and consecutive losing trades are part of the trading game. Knowing what is considered a “typical” drawdown can help you mentally prepare.

First, you will notice as you increase the percent risk your return and maximum drawdown also increase. What you want to aim for is a maximum drawdown that is comfortable for you. Most people find a 20% drawdown or higher difficult to live with. For example, in the chart to the left a 1.25% risk produces a drawdown of 17.4%. This means 95% of the 5,000 Monte Carlo iterations produced a maximum drawdown of 17.4% or less. This implies that 5% of the iterations produced a higher drawdown.

Monte Carlo Simulations With Optimized Percent Risk Model

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In this test I wanted to determine what is the optimal percent risk value based upon return. I also did not want to the maximum drawdown to exceed 20%. #

Once again, the results were based upon 5,000 Monte Carlo iterations over the entire historical performance of Aurora Pro. The trading system’s default settings were fed into the Monte Carlo simulator which included a starting account size of $25,000 and $30 deducted for both commissions and slippage per trade per contract. #

The results are below.#

• Optimal Fixed Fraction: 1.42%

• Rate of Return at Optimum: 1,276%

• Max Percent Drawdown at Optimum: 19.9%

FAQAu

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Will there ever be a conflict when trading two strategies in Aurora Pro?

Both trading strategies enter at different times so there is no conflict. Furthermore, if a trade is open no other entry signals are taken. This ensures only one signal will be taken at a time.

What platforms is Aurora Pro available for?

Currently Aurora Pro is available only on TradeStation.

Will Aurora Pro work on other markets?

In short, yes. The system was designed for the E-mini S&P. However, it will function on other stock index future markets such as the E-mini DOW or E-mini NASDAQ. You will find the performance on these alternative markets not nearly as effective as the E-mini S&P yet, both remain positive. The E-mini DOW performs better than the E-mini NASDAQ while the breakout strategy seems to perform better than the mean reversion strategy. In the end, because Aurora Pro remains profitable on other markets, this is a testimonial to its robust nature.

I attached copies of the performance report for the NQ and YM markets to this email.

Has Aurora Pro been traded live?

Yes, within this report on page 9 you will find the live results of Aurora Pro.

e breakout trade per day is allowed.

Is seasonality factored into Aurora Pro's trades?

No. Aurora Pro does not take into account seasonality.

Does Aurora Pro use limit orders?

No, Aurora Pro uses market orders to enter and exit trades.

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Can I trade with only $10,000

Technically, yes. This is recommend only for the Breakout Strategy. Thus, you will need to disable the Fade strategy portion of the system. Please review the User Manual on how to do this.

How big should my account be?

To properly trade both the mean reversion and breakout strategy it is recommended you have a trading account of $25,000 or more.

Is the source code available?

Yes, if you purchase the Aurora Pro trading system you can get the “open” source code for an additional fee. This will allow you complete access to the trading logic.

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Aurora Pro is a fully automated quantitative trading strategy for the retail trader.

Questions Comments: sales@capitalevolutionllc.comLearn More: Aurora Pro Trading System#

AURORA PRO