The first 74 days, and what we still cannot claim

Dear Partners,

This is the first letter of a new series, and it is numbered one on purpose. Several years of research sit behind us, but the account we now report on is a single account running a single strategy. Everything else is what we tested and threw away, and half of this letter is about that.

We start there, because the result on its own reads as nothing more than two good months.

What we actually do

We sell ETH against ETH we already own. The stack sits in ETH, the short is opened in an inverse (coin-margined) contract, and both what we put up and what we earn are ETH. So the account grows in coin: what it makes does not need converting back, it is already in the asset you hold.

The bet is plain. Price overshoots on the way up, and it tends to come back. We take a small piece of the way back and leave. This is not a secret formula. It is the most written-about class of signal in the industry, and we say so: the edge is not in the idea, it is in our willingness to run it without improvising.

More important than what we do is the list of what we stopped doing.

Averaging down. For a year we scaled in: price moves against us, we add lower and wait for the turn. It sounds reasonable and it feels brave. Measured over nine years at identical exposure, single entry returns 11.45× against 1.96× for the pyramid. The reason is unpleasant and obvious afterwards: a pyramid adds size precisely when the position is wrong. Averaging down no longer exists in the strategy. It is not switched off by a flag, it is removed as code.

The entry pattern. We used to read candles, hunt exhaustion formations and take pride in it. We measured it: the entry had stopped mattering. The strategy now enters on a schedule, in a few fixed slots a day, and does not look at candle colour at all. It turns out the market does not care how good our reasons sound.

The second asset. We ran the same trade on bitcoin and put it through the audit ETH passed: 405 versions, and the test for curve-fitting came back at p = 0.83 against 0.028 for ETH. The improvement did not hold. The result that looked best turned out to be a side effect of measuring in dollars. The leg closed on 1 August. We no longer run a bitcoin account, and that is a decision, not a pause.

A fund that adds an instrument every quarter grows wider. We chose to grow deeper, and we admit that is the less photogenic option.

The most useful table we produced all summer. We split the nine-year result into stages: how much comes from the shape of the trade itself, how much from the forced exit, how much from the regime filter. All in coin, all on ETH.

Read the second row carefully. Our signal on its own is worth almost nothing. The whole value of the structure lives in the circuit breaker, worth 5.29×, and the regime filter, worth 1.48×.

We could have left this out. We publish it because it sets the central rule of our work: if nearly all the value sits in one component, all of the risk sits there too. That component once failed on us quietly. It is now the first thing checked, every time, with tests written around it that fail if it dies.

Mechanically the circuit breaker is our version of expiry. A sold option has a term and closes itself. A perpetual short has no term, so something has to close it. For us that something is a rule: a position stuck in a confirmed uptrend for more than two weeks is cut, and going back into that same trend is blocked. What this looks like in practice is in Part II. It happened twice in 74 days.

A strategy that looks good on its own data is either an edge or a tidy coincidence, and the difference is only visible from the outside. So we looked from the outside.

We ran not our preferred version but all 315 that our parameters can produce, and tested them with a method that charges us for exactly that kind of search: p = 0.028, inside the 5% bar. A second, independent measure came back at 0.971. Two methods built on different mathematics agreed to three decimals.

Two things matter more than the number. Of the 315 versions, 270 are positive and not one has a negative mean, which is a plateau rather than a needle. And the one we trade ranks 59th, not first: we did not pick the maximum. Had we done so, this letter would read better and the account would do worse.

Separately we measured, rather than guessed, our position size: 62% of the stack short when we are fully in. The cost is stated plainly, drawdown in coin rises from 28.6% to 34.8%. We capped ourselves at 79%, and that ceiling is set not by nerves but by how wide the measurement gets around the best point. We stop where we stop being sure we understand what we are doing.

Our nine years are crypto, and they are our own data. So we took the Cboe BXMD index: covered calls on US equities going back to 1988. A different asset, a different era, structurally the same payoff.

Agreement to three decimals on data we could not possibly have touched. Which means what we do is a property of the payoff, not a quirk of our period. There is a flip side, and it is at the end of this letter.

All of the above landed on one configuration. We call it flat: a flat 3.5% target, one entry, no averaging down, no pattern. Here is how it did.

Starting capital 50 ETH, funded on 1 June. There have been no additions: everything below was earned by the account and put back into it.

The line that matters is the second, not the first. ETH fell 6% over these 74 days, and the stack of ETH in the account grew 10%. For someone who holds the coin, that is the whole point of the structure: it works in the currency you count your wealth in.

June: the market fell, and we lived on it. ETH went from 2,006 to 1,520, the strategy entered on schedule and left at target. Eight trades in a row, seven of them closed inside a day and a half. The stack reached 60.04 ETH. Weeks like this make the work look dull and pleasant.

26 June: the market turned, and we paid for it. Entry of 5,718 contracts at 1,545.41, and instead of coming back, ETH ran to 1,772. The position went 18.7% underwater. After 14 days the circuit breaker did exactly what it is written to do: it cut the position for a loss of 4.75 ETH. That single loss ate half the profit of the eight trades before it.

10 July to 13 August: five weeks of silence. And this is the most important thing that happened on the account. The strategy placed no trades at all. Not for want of chances: 134 entry slots came and went. Every one was blocked, because the rule forbids opening a new fade inside the same confirmed uptrend that has just cost us money.

The rally we declined to fight ran another month. The strategy came back on 13 August, once the trend stopped confirming. In 74 days the same mechanism managed both to take half our profit and to stop it taking the rest. These are not two stories. They are one.

The last row is the position still open on 14 August: entry 1,882.02, target 1,816.15.

Note the eighth row. That position sat underwater for nearly twenty days and went 17% against us before closing in profit. It came within a hair of being the second forced exit. We show it because the difference between patience and stubbornness is invisible on a chart. In our work it is decided by a rule, not by how we feel that morning.

The formal win rate for the period is 89%. We have to say it is the least useful number in our reporting, and here is why: eight wins produced 9.62 ETH, one loss took 4.75. The average win is 1.2 ETH, the single loss is four times larger.

That is how the strategy is built: many small gains and rare big losses. We measured that shape over nine years, the skew is negative, and it is by design, not a fault. Anyone selling you a 90% win rate without immediately saying the next sentence is selling you half the information.

We would rather you heard the unpleasant part from us early than from the market on time.

We will fall behind in rising markets. From that same 38-year history of our kind of strategy: the worst shortfall against simply holding the market is 48%, the longest unbroken stretch of lagging is 14.6 years, and at the time of measurement it had not ended. From our own data: on up days we beat the market 27% of the time, on down days 72%. The line we ask you to remember: we take about 0.8 of the market's move, and everything we earn on top of it comes from the falls. In a long bull market we will look silly. That is the price of the structure, not a fault.

Drawdowns will be deeper than the one in this letter. The 10.18% of this period is the mild case. Over nine years at the size we run now we measured 34.8% in coin, and we put the chance of ever losing 30% of the coin stack at roughly one in five. In dollars the figures are several times uglier, and that is equally true of simply holding ETH.

There is no stop-loss in the usual sense. A position closes at its target or by the breaker rule. That is on purpose, not an oversight, and it is exactly what makes us keep spare capital and stay well under the size we could take.

And 74 days is not a sample. Nine trades, one forced exit. The period shows the mechanism behaves as designed and says nothing at all about the next quarter. We would be grateful if nobody, ourselves included, multiplied 10.01% by five.

Over the first reporting period the account grew from 50 to 55.00 ETH, up 10.01%, in a market that fell 6% over the same span. The strategy gave back half of what it had earned in a single forced exit, then refused to enter the market for five weeks. Both times this was the same rule, and both times it was right.

Our next letter will not bring a brilliant new idea. It will most likely bring the same one, tested once more, next to a list of what we tried and threw away during the quarter. If that sounds dull, it is exactly the impression we are working towards.

Thank you for your confidence. We are glad to answer questions in person, including the awkward ones, for which we are usually best prepared.

Yours faithfully,
Isochrons Capital

The circuit breaker cost us 4.75 ETH this period and saved us an unknown amount. The first is measurable and the second is not, which is the whole difficulty of explaining our work.

Five weeks without a single trade is either discipline or idleness. This letter is not authorised to make that distinction, and neither is the rule that produced it.

We are better at finding our mistakes than at making them. So far.

Past performance does not guarantee future results. Returns are calculated in the contract currency (ETH); the dollar result for the period differs and is stated separately. Single-period figures are not suitable for extrapolation.