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Paul Priestley

Diffusion Trading System

Program(s) Developed: John F. Gallwas, Founder of Striker Securities, Inc.

Interviewed by John F. Gallwas, Founder of Striker Securities, Inc.

Priestley Systems developed "The Diffusion Trading System", one of the top performers at Striker in 2013 and 2014. The owner and system developer is a European trader and wishes to remain anonymous. Messages can be forwarded to him by Striker. After majoring in physics at Cambridge and Oxford in England, he has pursued a career in teaching for the past forty years, as well as using computers to trade his personal account. He built his algorithms from scratch for his own trading and has only recently permitted other traders to participate.

John F. Gallwas: Congratulations with Diffusion rate of return of 178.03% a/o September 26th 2014 - does this rate of return since inception at Striker come in line with your expectations?

Developer: Yes, we had a very good patch from December through April as well as some flatter periods. The year as a whole has been slightly better than the back-testing results: in the last ten years, Diffusion made an average of $12000 a year and in the last twelve months around $16000 (gross of costs).

John F. Gallwas: Tell us about Diffusion 3 - why the name? what makes it different?

Developer: Well, I noticed that several clients are trading multiple lots of Diffusion and it occurred to me that a better return-to-risk ratio could be achieved by trading variants of the system, rather than multiple lots of the same thing. So I studied variations of the algorithm and came up with alternative similar - but not identical - systems, which I called Diffusion 2, 3, and 4. Diffusion 3 was the most robust, so I decided to offer that to clients. It takes the same trades as Diffusion about six times out of ten, and then takes some trades which Diffusion does not. The drawdowns have been similar, but only about 50% correlated in time, so someone trading one of each would have seen the same overall growth with a smaller overall drawdown than someone trading two lots of the same system. There may also be a slight difference in slippage as the two trade at slightly different times and there are now over 100 lots of Diffusion being traded.

John F. Gallwas: Your system Vacuum Pump has a rate of return of 43.76% a/o September 26th 2014 - what makes this system unique and drive?

Developer: Vacuum Pump seeks to "vacuum out" a profit from the tendency of the stock index to mean-revert. The mean reversion has some particular features which the system seeks to exploit. Vacuum Pump tends to be in the market for a series of trades alternating short and long as the market zig-zags and then stands back for a while when the algorithm predicts that the mean reversion will be a smaller part of the price movement.

John F. Gallwas: Some of our client are aware of you in our March 2014 interview, but however, tell us again how you became a system developer?

Developer: I first became interested in futures nearly 40 years ago, but it was always a hobby rather than a career. My field is physics and math and I've always been fascinated by the idea of finding patterns in seemingly chaotic data.

John F. Gallwas: Do you need to update your trading systems to keep pace with changing market conditions?

Developer: It can be very tempting to keep re-optimising your systems when they seem to be fitting the live data less well than before, but it can be quite dangerous. I've seen other system-developers keep readjusting and watched the results turn out badly. The problem is that even the best systems have flat or losing periods and, if you rush to change whenever that happens, you end up like the non-system trader whose trading suffers from emotional decisions. I wouldn't say "never", but any adjustments should be made only after a long period of observation and analysis....in effect rebuilding a system from scratch if it stops working. I've not adjusted the algorithms on any of the systems I trade with Striker.

This interview is for informational purposes only and is not intended to be a solicitation of any kind. Trade only with risk capital. The risk of trading can be substantial and each investor and/or trader must consider whether trading systems are a suitable investment.