Thursday 28 June 2018

Momentum system


Sometimes we look for a clear trend in the different markets. This can be difficult these days because the volatility is back. I believe that there are many opportunities but you need to adjust the strategy’s timeframe. Obviously, when we see the chart at the final of the day,  it´s easy to see the levels where we should have bought or sold. I would be happy as far as you do this in order to learn the order flow and how the news affected the security. However, you shouldn’t take seriously the important levels of the day (if you are only checking the day instead of a longer timeframe) because anyone knows what is going to happen tomorrow. I wouldn´t like to discourage you if it works for you but in my opinion is like singing “if I were a rich man” without trying to make money.

Why is the data important? Introduction to the system

As I said indirectly in the first paragraph, I don’t know what the asset prices are going to do tomorrow. The most important for me, leaving my thoughts apart, is the historical data. Here is where statistics takes importance. Let’s get biased for a minute thinking that every time that the price is above an indicator (or another variable) we should buy and every time is below the chosen variable we should sell.


Let´s take the Moving Average 9 as this variable and check the probabilities.

                                               Probability table, example own elaboration

Only to sum up, we have a buy signal every time that the opening is above the MA9 and a sell-side every time the opening is below this indicator. This example is not the best one. I wouldn’t publish this screenshot in a book. Apart from this joke, we had 426 buy signals but only 203 days that the future closes above the opening. Investing in a strategy that has 47.7% success ratio doesn´t seem the smartest thing to do but this is where the money management comes! In the case of the sell signals, it's slightly better showing 52.4%.

Backtesting

Before I show the results I would like to confirm that I´ve used the 5-day moving average instead of the MA9.  The main reason is that the performance was better and the drawdown was lower. This test has been done with the FESB historical data (Eurostoxx Banks). The reason why I chose this product is because I thought that it was directional enough to apply the strategy.





                                                  Backtesting statistics, own elaboration using R programming

As you can see the backtesting results are not bad. Each trade generated 6.42 EUR on average. The biggest win was 740 euros which is great considering that we started with 10000 EUR. I used a tight stop loss, only 2 ticks. Even with that, we can see that the FESB is very directional and the stop was hit only on 53% of the trades. The return has been 56.60% in almost 3 years and a half.



      PnL curve, own elaboration using R programming


The most interesting thing is that after the max drawdown (1570 between the 98th day to the 270th day) it has been rising. Obviously, when your portfolio has grown and you are using the same money management and risk management, the drawdowns are smaller than at the beginning. 



                                                      Max drawdown, own elaboration using R programming


Each trade was simulated with 2 lots and the maximum daily loss was 20 EUR (2% of the initial capital)

Sum up

I like analyzing trading systems and I´ve been working on this strategy for a while. I´m surprised about its performance because I expected worse statistics. Surprisingly, the % of successful trades were almost the same as the previous example shown above. This post doesn´t show the real performance because the commisions are not included. I will write a post in the future explaining why the short-term moving averages fit better than the long term in this kind of system. I hope you like it.
Have a good trading!! 




Disclaimer


I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Monday 18 June 2018

Recommended article

Hi. I have been reading a lot these days. One of the best articles I´ve read lately is the following:

http://www.zerohedge.com/news/2018-06-16/global-bond-curve-just-inverted-why-jpm-thinks-market-crash-may-be-imminent

It doesn't matter if it comes from JP Morgan (like this case) or from a top Hedge Fund. The analysis is excellent. I'm a big fan of the interest rate curve. Its movements are only monitored by top traders and portfolio managers but you can extrapolate a lot of investment ideas. The main problem, as always, is getting the data. I would like to congratulate ZeroHedge for bringing this kind of content. Thanks.


Have a good trading!!

Sunday 3 June 2018

Italy, new political uncertainty


This is a brief article about the positions we can take if one country has political problems or its economy is weakening versus other countries or economic areas.

Italy


The president denied a group that was elected because he thought that having a eurosceptic finance minister wouldn´t be right for Italy. This generated a big sell-off on the Italian bonds due to the political uncertainty. After two days Giuseppe Conte was presented as a prime minister. There are a lot of doubts about the future because the new government rejects austerity. In addition, one of the measures is reducing the tax to 15-20% for individuals and corporates. Probably this is good in order to expand the economy or promote new investments. On the other side, this will generate larger déficit. 

    FBTP Jun18,  daily, Source: TradingView

The volatility has increased in the last five days. The FBTP Jun18 was in free falling the last Monday and Tuesday. After that, it has recovered.

FGBL-FBTP Spread

     FGBL vs FBTP Jun18, daily, Source: TradingView

The spread vs the Bund and the FBTP has increased dramatically. In the best scenario, a trader would have bought the FGBL Jun18 and would have sold the FBTP Jun18 at the beginning of the week or even when it broke the 26 level. The reason behind this is covering and hedging in some way because the bund is more stable So basically, we are reducing volatility. The Italian Bonds yield’s jumped due to the political uncertainty and the possibility of breaking the relationships with Europe.

Sum up

We have seen how volatile the markets can be in these situations. One of the best ideas is spreading versus a safer bond as I showed above. In my opinion, Italy won’t leave Europe. I will talk about Spain in the following post. Thanks.

Have a good trading!!!




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