EarlyBird is a completely mechanical daytrading system designed primarily for the S&P and e-mini S&P futures contracts. It is called "EarlyBird" because the majority of the trades are initiated early in the day. First traded in early April, 1999, the system has a profitable out-of-sample,
real-time* hypothetical track record of over 4 years.
EarlyBird may be purchased, or it may be leased for a set fee (as little as $45/month) or an incentive fee. If the system is leased, it is traded for clients through selected brokers. Also be sure to review the latest version of EarlyBird, EarlyBird III, released in January, 2003. This release produces 50% more profit on 35% less drawdown.
HOW WAS IT DEVELOPED?
The main ideas for EarlyBird were first developed in February of 1999. The z1996-h1999 contracts were used as the initial test period. By late March the system parameters were set, and trading began in April. The system is a simple one to learn and trade. Because it is only in the market less than a day per week, it does not require a lot of time watching the screen, especially if you utilize a "system-assist" broker who trades the system automatically for you.
In over 52 months of profitable real-time*, out-of-sample results, EarlyBird has proven itself to be a consistent performer.
HOW DOES IT WORK?
Original EarlyBird is actually two independent systems (EarlyBird II is three systems); one trades with the trend, and the other is countertrend, the difference being determined by a particular measure of price movement. The two systems can be traded separately, but together they form a theoretical whole which results in a smoother equity curve. The proprietary systems are based upon a simple distinct and quantifiable price action that serves as a unique filter condition. When price dictates, the trade is entered. No complicated calculations, concepts, or indicators are involved. In fact, the only factors involved in the system trading decisions are time and price.
EarlyBird trades a bit less than once per week on average. For one of the systems, orders are placed the night before; for the other, early market action determines whether there will be a setup. The majority of days, the trader knows if there will be a trade soon after the market opens.
Trades are entered using stops. For one of the systems a profit objective is used, while both employ a break-even stop, which moves the stop to break-even (or a small profit) when a trade has advanced sufficiently. Protective stops are used in all cases, and the maximum risk is always known before a trade.
Since April of 1999, two minor changes have been made, both because of practical considerations. One reality of trading is that it often requires stops so that the trader isn't as tempted to exit a trade early; these stops make the psychological job of trading easier. It is often difficult to consider letting a nice paper profit become a potential loss, so a break even stop was added to lock in a small profit once a trade has gone sufficiently to the good. This simple stop was implemented in June, 2000,and it altered only one trade in the study period. Secondly, a minor element of one of the system components utilized the value of the open. Because the official opening price is sometimes not determined until minutes after the open, this rule on occasion would lead to different interpretations. Since the rule only affects an average of one trade per year, in January of 2001 the system was simplified and the use of the open dropped. No changes have been made since then.
EarlyBird looks for a particular type of volatility and is very predictive of days that have strong swings. Being selective about the market conditions means that there are some periods when the systems do not trade at all and others when they trade frequently. It is this ability to discern the better trading days that has helped EarlyBird succeed.
WHAT ABOUT OPTIMIZATION OR CURVEFITTING?
A good system is based upon empirical observations of the market, rather than a computer blindly crunching numbers. Through observation, patterns are noticed. These patterns, when objectified, may become a series of trading rules. By its very nature, a pattern is a form of optimization, because the extraneous is ignored in order to see the rule.The trick, then, in trading is to not overoptimize or overcurvefit. EarlyBird is built upon observations refined through testing, rather than based upon testing.
HOW DO YOU KNOW WHEN A SYSTEM IS OVEROPTIMIZED & WHEN IT IS ROBUST?
The first consideration is the number of optimizable parameters. Many systems claim to have few optimizable parameters, when in actuality they have more that could be optimized, but were either not because the developer made a choice of a value and stayed with it or because the developer did not want purchasers to adjust an optimized value. EarlyBird contains one primary optimizable entry variable, two timing entry variables, and two variables for each of the three stop strategies for each of its two systems . A second factor is where the trade results of the system's chosen values (of the optimizable variables) are in relation to the results of other possible values. We look to avoid a spike--an unusually high result--because it may just be an aberration of the data one is using for the study period (the data set over which he system was developed). The chosen values should be somewhere in the middle of a gradual curve of the plot of equity results. Virtually all nearby combinations of EarlyBird test profitably, and all results within several steps of the chosen parameters are profitable. In other words, the chosen parameters are not values giving unusually high results, but instead are in the middle of a moderate curve. This means that the chances of success in real-time trading are greater, since the inevitable variations in the best values for a given period will have more chance of falling within a profitable range. Probably the most important factor is how out-of-sample results (results from applying the system to data not used to develop the system rules
OPTIMIZATION Continued
...and values) compare with in-sample, study period results. A rule-of-thumb is that real-time results will be yield one-half to one-third the profits at 2-3 times the drawdown of in-sample study-period results. Since EarlyBird was developed and first traded in April, 1999, hypothetical profit has been about half of the study period. Additionally, when EarlyBird is tested over the 10 years prior to the study period, it remains profitable. Look at the performance and risk pages in this site for more detailed information and analysis of EarlyBird's results.
An important way to determine robustness is to test a system on different markets. When applied
to the Nasdaq and Dow Jones contracts, both EarlyBird original and EB II are profitable.
HOW CAN THESE CLAIMS BE VERIFIED?
Probably the single biggest issue in chosing to purchase a trading system is how to verify the vendor's claims. EarlyBird has been tested by Futures Truth, an independent testing firm, and they have been tracking the system since 1/1/2001. Their testing and tracking confirms the numbers reported in this site. Specific EarlyBird results are available from FT for $50 for a complete report or a private opinion letter from George Pruitt for $25. Comparative results of the 181 currently tracked systems are available in Futures Truth Magazine, $30 per issue.
HOW DO YOU COMPARE SYSTEMS?
One of the simplest and most effective first steps in comparing systems is to look at two numbers, the largest historic drawdown and the yearly return. With these numbers you can get a rough idea of what you'll need to properly capitalize a trading account and what your potential profit might be per dollar risked. Then you can compare "apples to apples" by reducing systems to their reward/risk number. (This is not to say that this is all there is to it; there are many other considerations, but this is an important first step).
A publication like Futures Truth Magazine makes the job much easier by assembling the numbers. FT ranks systems by their annualized return (since release) divided by three times margin required. However, because margin has nothing intrinsically to do with the performance of a specific system, these rankings are less useful than one which divides annualized profit by historic high drawdown. Since drawdown is a number that does intrinsically relate to a system, and it is one that directly determines capitalization, it makes sense to use that number in judging a system, rather than the margin. EarlyBird's post-release drawdown is one of the lowest of the other top 20 daytrading and top 20 S&P systems. When you measure the top-ranked systems by comparing their profits in the last 12 months to their post-release drawdown--a reward to risk ratio--EarlyBird is one of the best. It achieved these results on fewer trades than most of the other systems.
A WORD ON REDUCING RISK THROUGH DIVERSIFICATION
One of the best and simplest ways to reduce risk and improve returns is to diversify by trading a variety of commodities and systems. If the trades generated by the different systems are at least somewhat uncorrelated, they will tend to balance each other's drawdowns, smoothing the equity curve. Because of EarlyBird's unique entry filter, its trade dates/times and equity curve differ somewhat from other systems. By adding EarlyBird to your trading portfolio, you lessen the chance of dramatic drawdowns and increase your chances for profits.
WHAT'S THE EASIEST WAY TO TRADE EARLYBIRD?
If you purchase EarlyBird, you will receive the fully revealed system in a TradeStation ela file & written text rules. If you lease EarlyBird, the rules are not revealed, & you would trade it through selected brokers. A lease has several benefits: 1) it limits the release, because I only have to specify the system rules to a few select brokers, who trade the system for you; 2) it is less initial financial outlay for you; 3) it is easier for you: since the broker handles all the trades; you won't have to spend hours in front of a computer screen; 4) it assists effectiveness & accuracy; the key to a good bottom line in most S&P daytrading systems is keeping slippage & commissions reasonable; by leasing EarlyBird, you will have a broker familiar with the system, one whose execution is excellent; & 5) a trader is less likely to second-guess a system & is more likely to "stay with the trade" if a broker handles the trades.
