SwingSET Introduction

SwingSET Overview Updated 9.27.2012

Introduction

The SwingSET algorithm was developed on 30+ years of market data to determine a consistent set of parameters to take advantage of short term swings in the market in order to indicate when the probabilities of price direction have shifted.

For existing subscribers and traders that have been following LessThanRandom.com, the SwingSET is the new and more descriptive name for the LRX strategy.

The following back testing information and statistics are provided for the purpose of understanding the historic expectations of the signal along with the risks and opportunities that may be available in the future.

Updates and recent back testing information available at: http://lessthanrandom.com

Important Disclosures

All information is derived from historic market conditions and is not a guarantee of future results. This material is being provided to you for educational purposes only. No information presented constitutes a recommendation by LessThanRandom.com, Falde Capital Management, LLC, or its affiliates to buy, sell, or hold any security, financial product or instrument discussed herein or to engage in any specific investment strategy. The content neither is, nor should be construed as, an offer, or a solicitation of an offer, to buy, sell, or hold any securities. You are fully responsible for any investment decisions you make. Such decisions should be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance and liquidity needs. All trades shown are hypothetical and simulated in a historic environment and are not intended to represent your experience trading.

About

The SwingSET ('Statistically Efficient Timing') is a swing trading strategy for underlying assets that are prone to either range bound conditions or slow moving trends. Most broad base indexes fit this description as well many equity and bond instruments.

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© 2012 Andrew Falde | lessthanrandom.com Page 2 of 40

The strategy performs best during moderate volatility up, down, and sideways markets. Fast moving rallies and declines are not favorable, however historically these periods are not detrimental to the strategy's P/L curve.

The nature of the strategy is to take contrary positions during short term swings. The positions are then held until reversed when there is a short term swing or consolidation in the opposite direction. Time and/or price movements can trigger a reversal so specific limits are not used. Stops may be used but they have minimal impact on the strategy's effectiveness. For this reason, we use defined risk options spreads so that extreme market conditions do not cause outsized draw downs in P/L.

So far, all options back testing performed on historic signals improves the reliability, consistency, and profitability of the signals. Options back testing is time and labor intensive; so additional information on options back testing will be available in the future on lessthanrandom.com.

Example P/Ls on Asset Types that Perform Well

The S&P 500 index (SPX) is the focus of this report. However, a few P/L curves for various indexes, stocks, and ETFs are shown on the following pages. These assets are all lower Beta (less volatile) and prone to be range bound or slowly trend.

Example P/Ls on Asset Types that DO NOT Perform Well

Following the good examples are a couple P/L examples of high Beta (volatile) stocks that DO NOT perform well. Higher Beta stocks don't work on this strategy because they are more likely to trend. For this reason it is better to trade a trend following strategy on these stocks.


Examples of Assets that Swing Trade Well

SPX (S&P 500)

DJI (Dow Jones 30)


Continued... Examples of Assets that Swing Trade Well

RUT (Russell 2000 Mid Cap)

TLT (20 Year Bond ETF)


Continued... Examples of Assets that Swing Trade Well

JNJ (Johnson & Johnson)

VIX (S&P 500 Volatility Index)


Instruments that DO NOT Swing Trade Well

AAPL (Apple)

NFLX (Netflix)


30 Year SPX Signal Review

The following P/L curve for the SPX covers signals from September 1982 to September 2012.

Vs. Actual SPX Price Change (not to scale)

2012 YTD Signal v. Options Trades


Several options back tests were performed on the signals to find how best to enhance the signal performance.

The following chart is a close up of the 2012 YTD signals P/L (in blue) overlapped by the P/L curve of options trades on the signals (in red).

The trade used to generate the options P/L is a .45 Delta short vertical in the direction of the signal. The first contract with more than 20 DTE was traded and held until an opposite signal was generated or 7 DTE, whichever occurred first.

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25.00%

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Signal P/L Options P/L


List of Trades

The following is a list of each signal and trade for 2012 YTD. This information has also been gathered for the past 4 years and will be available to program subscribers in the near future.

Date Signal Signal P/L Signal YTD Trade ROR Trades YTD 10% ACCNT Risk 01/27/12 Long 0.59% 0.59% 9.6% 9.6% 1.0% 02/01/12 Short -1.45% -0.86% -23.8% -14.2% -1.4% 02/15/12 Long 1.34% 0.48% 18.7% 4.5% 0.4% 02/17/12 Short 0.26% 0.74% 8.2% 12.7% 1.3% 02/22/12 Long 0.43% 1.17% 8.2% 20.9% 2.1% 02/23/12 Short -0.06% 1.11% 5.9% 26.7% 2.7% 03/05/12 Long 0.12% 1.23% 1.1% 27.8% 2.8% 03/08/12 Short -1.97% -0.74% -30.0% -2.2% -0.2% 03/22/12 Long 1.70% 0.96% 23.2% 20.9% 2.1% 03/26/12 Short 0.77% 1.73% 24.2% 45.1% 4.5% 03/28/12 Long 0.21% 1.94% 6.1% 51.1% 5.1% 03/30/12 Short 0.68% 2.62% -0.3% 50.9% 5.1% 04/04/12 Long -0.58% 2.04% -15.2% 35.7% 3.6% 04/17/12 Short -0.06% 1.98% 8.8% 44.6% 4.5% 05/03/12 Long -5.09% -3.11% -79.0% -34.5% -3.4% 05/24/12 Short 3.23% 0.12% 61.0% 26.5% 2.7% 06/01/12 Long 2.90% 3.02% 28.5% 55.0% 5.5% 06/06/12 Short -0.79% 2.23% -2.6% 52.4% 5.2% 06/21/12 Long 2.76% 4.99% 36.5% 88.9% 8.9% 06/29/12 Short 1.52% 6.51% 66.9% 155.8% 15.6% 07/11/12 Long 1.66% 8.17% 22.9% 178.7% 17.9% 07/17/12 Short 1.86% 10.03% 44.5% 223.2% 22.3% 07/24/12 Long 1.62% 11.65% 22.9% 246.1% 24.6% 07/26/12 Short -0.37% 11.28% -9.6% 236.5% 23.6% 08/02/12 Long 1.90% 13.18% 15.1% 251.6% 25.2% 08/03/12 Short -0.94% 12.24% -12.6% 239.0% 23.9% 08/13/12 Long 0.81% 13.05% 11.5% 250.5% 25.1% 08/16/12 Short 0.17% 13.22% 5.6% 256.1% 25.6% 08/21/12 Long 1.34% 14.56% 16.6% 272.7% 27.3% 09/07/12 Short -1.93% 12.63% -30.8% 241.9% 24.2%

NOTE: See attached trade by trade risk graphs of options on signals for 2012 YTD


Summary

The SwingSET algorithm and options trading strategy is practical and not difficult for independent traders to implement so long as they have a strong understanding of trading index options and at least 1 year of live trading experience.

To ask questions or begin your subscription to the SwingSET algorithm signals, visit http://LessThanRandom.com

Coming Soon!

• More options back testing results on the SPX SwingSET • Back testing results on RUT and other instruments • Alert subscription on RUT and other instruments • Trend following alerts that complement and enhance the SwingSET strategy by

performing better during strong trending markets while still maintaining smooth P/L during choppy and range bound markets

To receive updates on these upcoming reports and services... visit the homepage of Less Than Random and subscribe to the general email updates.

Thank you for taking time to review this information. I look forward to any questions you have.

Sincerely,

Andrew Falde LessThanRandom.com [email protected]

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2012 YTD Options Trades on SwingSET Signals

1-27-12


2-1-12


2-15-12


2-17-12


2-22-12


2-23-12


3-5-12


3-8-12


3-22-12


3-26-12


3-28-12


3-30-12


4-4-12


4-17-12


5-3-12


5-24-12


6-1-12


6-6-12


6-21-12

5


6-29-12


7-11-12


7-17-12


7-24-12


7-26-12


8-2-12


8-3-12


8-13-12


8-16-12


8-21-12


9-7-12

Documents

SwingSET Introduction