Keith's Trading

I developed Aberration in 1986 and first marketed it in 1993. None of the four portfolios we recommended in the trading manual had a losing year for nine straight years. But starting about the year 2000, the basic commodity markets were becoming increasingly volatile.

I sought to find an answer to trading the markets in the new, more volatile environment and focused on risk throughout a signaled trade. The answer I found was relatively simple: if risk is outside normal bounds when the trade is signaled, the trade should be bypassed. Or, if risk gets outside of normal bounds during a trade, the trade should be exited. The original Aberration system was augmented with rules to implement this logic, and the result is THE ABERRATION STRATEGY.

The performance reported in this letter 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.

The following tables show the performance of THE ABERRATION STRATEGY on a basket of 70 world-wide commodities from 1980. A slippage/commission figure of $50 has been deducted from each trade.

Grains (1980 - February 2007)
Commodity	Winning Trades	Losing Trades	Total Profit	Profit-per- Trade
Corn	29	27	$10,987	$196
Oats	18	36	-$7,000	-$130
Soybeans	25	29	$22,612	$418
Bean Meal	22	35	$2,679	$47
Bean Oil	26	32	$7,588	$130
Wheat	20	35	-$813	-$15
KC Wheat	21	30	$13,475	$264
Rough Rice	20	16	$11,689	$324
Crude Palm Oil	11	10	$7,918	$377
Totals	192	250	$69,135	$156

The performance of the strategy is fairly consistent across the commodity groups, with the currencies, energies, US financials, and metals trading the best. In this group of 70 commodities, only 8 have seen a loss over their lifetime and 4 of those are domestic stock indices. This is remarkable considering the fact that the exact same rules and parameter values are used for the whole set.

HOW YOU TRADE THE ABERRATION STRATEGY

We've developed portfolios for various account sizes. Each portfolio uses diversification across the groups, and a first-N-in-a-group trading approach. The smallest portfolio was built by selecting the lowest risk, best performing commodities. Risk was always considered first. Succeeding portfolios build on the last by adding more commodities to each group.

STARTER PORTFOLIO

THE ABERRATION STRATEGY starter portfolio is suitable for accounts starting in the $10,000 to $30,000 range. The portfolio is diversified across seven commodity groups to gain exposure in uncorrelated markets. The commodities in each group have been carefully chosen for their profit-to-risk characteristics. The portfolio is: Soybeans, KC Wheat, Live Cattle, Lean Hogs, Cotton, Sugar, Palladium, Copper, Crude Oil, Heating Oil, the Dollar Index, Swiss Franc, 10-Year Notes, and 2-Year Notes. Only one commodity in each group is traded at a time, and a one-lot is traded. A slippage/commission deduction of $50 has been taken from each trade. The following equity chart shows portfolio growth since 1980.

As the graph shows, equity buildup is fairly smooth and consistent. With an average annual profit of $13,209, the average first-year return on a $10,000 to $30,000 account would range from 44 percent to 132 percent. From the risk point of view, the average start-trade draw-down a trader could expect when initiating trading this portfolio would be $2,261, between 8 and 23 percent of starting equity. But the trader should note that in 1995 the maximum start-trade draw-down was $10,889. As equity builds, the portfolio can be expanded to maintain a high rate of return.

The following table shows portfolio performance year-by-year. The column marked average start-trade draw- down is compiled by finding the start-trade draw-down for the portfolio starting at each trade origination and then averaging the results. For example, if the portfolio generated 30 trades in a given year, 30 portfolio equity curves would be generated, one starting at the trade origination of each trade, and the low equity point found for each equity curve. The maximum start-trade draw-down for the year represents the largest point below starting equity a trader would have seen had he started trading the portfolio at the worst possible time that year. (Note that the start-trade draw-down tests every trade originating in a given year, but that the low equity point may occur in the next year. These are reported in the trade origination year averages)

Forming a reward to risk ratio by dividing average first-year profit by average start-trade draw-down, the "gain- to-pain" ratio is 5.84. This metric can be used to compare portfolios against each other.

By looking at the distribution of all start-trade draw-downs, a probability of success can be determined. The following figure shows the distribution generated by the software. It shows the probability of experiencing a start-trade draw-down of a certain amount of dollars or less. For example this portfolio's distribution shows that 60 percent of the time traders initiating the trading of this portfolio would experience a start-trade draw- down of about $2,000 or less. And about 97 percent of the time, the start-trade draw-down would have been about $8,000 or less. Conversely, 3 percent of the time the start-trade draw-down would have been greater than $8,000.

If margin estimates and starting account equity are factored in, the probability of success can be determined. On average, there are 3 group trades on at a time. Assuming an average margin of $1,500 for each commodity in this portfolio, the average margin requirement would be about $4,500. If starting account equity were $15,000, approximately $10,500 of reserves above the average margin requirement is left for a start- trade draw-down cushion. Entering the figure with $10,500 and reading over to the line, historically there was a 98 percent probability of success. But if an account was initially funded with $10,000, the $5,500 of reserves would yield only an 85 percent chance of success. This type of analysis is instructive, but remember the maxim, "A STRATEGIES' LARGEST DRAW-DOWN IS ALWAYS IN THE FUTURE".

THE ABERRATION STRATEGY mid-size portfolio is suited for accounts starting in the $30,000 to $50,000 range. The portfolio is diversified across seven commodity groups to gain exposure in uncorrelated markets. The commodities in each group have been carefully chosen for their profit-to-risk characteristics. The portfolio is: Soybeans, KC Wheat, Bean Oil, Live Cattle, Lean Hogs, Feeder Cattle, Cotton, Sugar, Lumber, Palladium, Platinum, Copper, Crude Oil, Heating Oil, Natural Gas, the Dollar Index, Swiss Franc, Canadian Dollar, 10-Year Notes, 2-Year Notes, and the Euro-Dollar. Only two commodities in each group are traded at a time, and a one-lot is traded. A slippage/commission deduction of $50 has been taken from each trade. The following equity chart shows portfolio growth since 1980.

As the graph shows, equity buildup is fairly smooth and consistent. With an average annual profit of $19,645, the average first-year return on a $30,000 to $50,000 account would range from 39 percent to 65 percent. From the risk point of view, the average start-trade draw-down a trader could expect when initiating trading this portfolio would be $3,156, between 7 and 11 percent of starting equity. But the trader should note that in 1995 the maximum start-trade draw-down was $14,957. As equity builds, the portfolio can be expanded to maintain a high rate of return.

Forming a reward to risk ratio by dividing average first-year profit by average start-trade draw-down, the "gain- to-pain" ratio is 6.22. This metric can be used to compare portfolios against each other.

By looking at the distribution of all start-trade draw-downs, a probability of success can be determined. The following figure shows the distribution generated by the software. It shows the probability of experiencing a start-trade draw-down of a certain amount of dollars or less. For example this portfolio's distribution shows that 70 percent of the time traders initiating the trading of this portfolio would experience a start-trade draw- down of about $4,000 or less. And about 90 percent of the time, the start-trade draw-down would have been about $8,000 or less. Conversely, 10 percent of the time the start-trade draw-down would have been greater than $8,000.

If margin estimates and starting account equity are factored in, the probability of success can be determined. On average, there are 6 group trades on at a time. Assuming an average margin of $1,500 for each commodity in this portfolio, the average margin requirement would be about $9,000. If starting account equity were $30,000, approximately $21,000 of reserves above the average margin requirement is left for a start-trade draw-down cushion. There has never been a start-trade draw-down of over $15,000, so the probability of success would have been 100 percent. This type of analysis is instructive, but remember the maxim, "A STRATEGIES' LARGEST DRAW-DOWN IS ALWAYS IN THE FUTURE".

THE ABERRATION STRATEGY full-size portfolio is suited for accounts starting in the $30,000 to $50,000 range. The portfolio is diversified across all eight commodity groups to gain exposure in uncorrelated markets. The commodities in each group have been carefully chosen for their profit-to-risk characteristics. The portfolio is: Soybeans, KC Wheat, Bean Oil, Corn, Rough Rice, Live Cattle, Lean Hogs, Feeder Cattle, Pork Bellies, Cotton, Sugar, Lumber, Coffee, London Cocoa, Palladium, Platinum, Copper, London Aluminum, London Nickel, Crude Oil, Heating Oil, Natural Gas, the Dollar Index, Swiss Franc, Canadian Dollar, Euro-Currency, Japanese Yen, 10-Year Notes, 2-Year Notes, the Euro-Dollar, the Euro-Bund, the 5-Year Note, the Nikkei, and the DAX Index. A max of four commodities in each group are traded at a time, and a one-lot is traded. A slippage/commission deduction of $50 has been taken from each trade. The following equity chart shows portfolio growth since 1980.

As the graph shows, equity buildup is fairly smooth and consistent. With an average annual profit of $43,921, the average first-year return on a $50,000 to $100,000 account would range from 43 percent to 88 percent. From the risk point of view, the average start-trade draw-down a trader could expect when initiating trading this portfolio would be $4,684, between 5 and 9 percent of starting equity. But the trader should note that in 2003 the maximum start-trade draw-down was $30,020. As equity builds, the portfolio can be expanded to maintain a high rate of return.

Forming a reward to risk ratio by dividing average first-year profit by average start-trade draw-down, the "gain- to-pain" ratio is 9.38. This metric can be used to compare portfolios against each other.

By looking at the distribution of all start-trade draw-downs, a probability of success can be determined. The following figure shows the distribution generated by the software. It shows the probability of experiencing a start-trade draw-down of a certain amount of dollars or less. For example this portfolio's distribution shows that 60 percent of the time traders initiating the trading of this portfolio would experience a start-trade draw- down of about $4,000 or less. And about 90 percent of the time, the start-trade draw-down would have been about $12,000 or less. Conversely, 10 percent of the time the start-trade draw-down would have been greater than $12,000.

If margin estimates and starting account equity are factored in, the probability of success can be determined. On average, there are 10 group trades on at a time. Assuming an average margin of $1,500 for each commodity in this portfolio, the average margin requirement would be about $15,000. If starting account equity were $50,000, approximately $35,000 of reserves above the average margin requirement is left for a start-trade draw-down cushion. Since there has never been a $35,000 start-trade draw-down on this portfolio, the historical probability of success was 100 percent. This type of analysis is instructive, but remember the maxim, "A STRATEGIES' LARGEST DRAW-DOWN IS ALWAYS IN THE FUTURE".

Many traders will review the portfolio material presented here (summarized in the table below) and decide that when account size grows, it is better to trade more than a one-lot in the "Starter Portfolio" than move up to the next larger portfolio. This is a mistake. those traders are focusing on profits rather than risk, which is the crucial element in whether a small-account trader will survive and grow to be a large-account trader.

The trader who looks at profits will see that on a $10,000 to $30,000 account, an annual return of between 44 and 132 percent can be made. He reasons that if he can make 132 percent on $10,000 by trading 1 contract per signal, when the account size grows to $20,000 he can trade 2 contacts per signal and still make 133 percent. This is true, but what he is neglecting is risk. Trading the starter portfolio with $10,000 yields an 85 percent chance of success; about a 5 out of 6 chance. That's exactly akin to playing Russian roulette. Doubling the number of contracts at $20,000 still yields the 5 out of 6 chance. Sooner or later this strategy will lead to a trading blow-out.

The true measure of the portfolio's effectiveness is the ratio in column 4 of the table. The higher this number, the better the return for the risk taken. As a small-account trader grows his account size, he should look to reduce risk (column 3) and take the best return he can get. RISK FIRST!

THE ABERRATION STRATEGY Global Portfolio is suited for accounts that are larger than $100,000. The portfolio is diversified across the commodity groups to gain exposure in uncorrelated markets. The commodities in the 70-commodity basket that had a profit-per-trade of $300, or more, were included in the portfolio. The portfolio consists of: Kansas City Wheat, Rough Rice, Crude Palm Oil, Soybeans, Live Cattle, Lean Hogs, Cotton, Sugar, Lumber, Coffee, London Cocoa, London Coffee, London Sugar, Silver, Gold, Copper, Palladium, Platinum, London Aluminum Alloy, London Copper, London Aluminum, London Nickel, London Tin, London Zinc, Crude Oil, Natural Gas, Propane, Heating Oil, Reformulated Gas, the Dollar Index, Japanese Yen, Swiss Franc, British Pound, Euro-Currency, Canadian Dollar, 30-Year Bonds, 10-Year Notes, Five-Year Notes, Ten-Year Notes, Euro-dollar, Euro Bund, Euro Bobl, Spanish Bond, Simex Japanese Bond, the DAX, the Hang Seng, the Kospi, the Nasdaq, the Nikkei, and the Swiss Market Index. The following table shows the return risking one percent of equity on each trade and limiting group exposure to four trades, or less.

These results illustrate the power of implementing the money management strategies available to the large-account investor. He can achieve a very high rate of return for a relatively low max annual draw-down. Moreover, he can adjust the percentage of equity risked to either increase his return or lower his draw-down until he achieves a risk/reward scenario suitable to his trading temperament. If, for example, a max draw-down of 14 percent and an average max draw-down of about 10 percent is too high for him, he can lower the amount risked and have lower expected draw-downs. Conversely, if he can stand more risk, he can up the amount risked and achieve a higher return. The graph compares average annual return and average max draw-down for a spectrum of percent of equity risked.

This figure illustrates a further point. As the percent of equity risked increases, return increases at a faster rate than draw-down. This can be seen in the slopes of the two lines on the graph, the return line is much steeper than the draw-down line. This is an important point. It means that THE MORE DRAW-DOWN YOU CAN STAND, THE GREATER THE RELATIVE REWARD.

• Fully Disclosed. The trading logic is fully disclosed so you'll know exactly why each trade is being placed. This is not a "black-box" system which frustrates traders because they don't know how they work.

• End-of Day System. You don't have to sit in front of a computer to trade THE ABERRATION STRATEGY. 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.

• Portfolios for any account size. You won't have to do complicated analysis to determine what to trade. We provide recommended portfolios for any account size, so you can start trading right away.

• 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 have open source code for that platform.

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 network of brokers who will execute the systems for you at a rate only slightly above the discount rate. These brokers are all highly experienced with ABERRATION and routinely it for clients like you. So if you purchase ABERRATION, you can open an account with one of those brokers 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 THE ABERRATION STRATEGY 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 THE ABERRATION STRATEGY, to the public for almost 14 years. In all that time no-one has ever claimed my numbers are "fudged" or inaccurate.

• A detailed trading manual which fully discloses the logic, 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.

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

THE ABERRATION STRATEGY can be purchased for the reasonable price of $1,995. You can order by credit card through a secure server by clicking the following link. Or, you can send a check to: