Looking at LS Crude Oil and its opportunities with calendar spreads

Introduction

As you know, the oil futures are on the move. Everything indicates that the LS Crude oil is heading to 80 according to Goldman Sachs and JP Morgan. I believe that it’s possible to reach 80 before 2019 considering the current price and its momentum. It´s an 11% upside from the current price. The LS Crude Oil Oct18 started the year at 58.58$ and yesterday, it closed at 72.27$.

LS Crude Oil Oct18

    LS Crude Oil Nov 18, daily, source: TradingView

This is the perfect chart to explain how this commodity has performed this year. It represents 24.39% up in the year. After the last OPEC meeting seems that has more upside potential because they didn’t agree on any increase in the oil production.

The Spreads

    LS Crude Oil Dec18-Jan19 Spread, daily, source: TradingView

Probably this is the best spread for new traders or even for experienced traders because they will have a lot of opportunities with limited risk. The spread has been ranging between 0 and 0.80 the most part of the time.  You can see that each time that it opened above this level was a clear sell signal.

   LS Crude Oil Dec18-Mar19 spread, daily, source: TradingView

We can see a bigger range in the 3-month spread as it was expected. I´ve never been involved with energy products but looking at the chart. I would consider buying below 0.60 and selling above 1.80. This is an easy conclusion, however, trading this spread is not that simple.  

     LS Crude Oil Dec18-Jun19 spread, daily, source: TradingView

To be honest, this spread seems an outright. When the front contract falls, the spread falls really aggressively at least in the first 7 months of the year. Both outrights have been converging in the last 2 month.

Conclusion

As I said, I haven´t been involved with energy products and this is why this post is not as big as the other ones. It´s a great product and there are so many ways of trading it. I think the Oct contract will keep going up. I’m not sure about the movement of the spreads because the back of the curve is converging with the front (as we saw in the 3-month and 6-month spread). Probably the producers are buying futures because they expect higher prices of this commodity in the future. I hope you like.

Have a good trading!!

FGBM vs FGBL

Introduction

I love macroeconomics, this is why I have some preference for the interest rate derivatives. If we check the main European fixed income futures, we need to have a look at the Eurex exchange. One of my favourites futures is the FGBL (bund future). However, it’s difficult to trade for individuals with small accounts because it’s easy to get stopped out. If the 10-year bund future is to volatile for you, I would recommend having a look at the FGBM (5-year bond future known as bobl) It has the same tick value as the FGBL and it´s less volatile. And if you are starting, I would definitely go for the FGBS (2 German bond future called Schatz).

Can we trade these products only looking at the macroeconomic indicators?

Well, I believe that you can, it depends on the size of your account, the trade size, the strategy (risk management, money management) …

If you have a big balance, you can trade according to the macroeconomic data as far as you trade a small size and you look for the medium term or long term. The problem here is that you need to create your own indicator that shows you the health of the economy. In the current environment, I find this challenging because some assets are influenced by the central banks' decisions and political uncertainty (it’s very difficult to measure these factors and include them in a model). I highly recommend to set up a stop if you are going to trade like this.

    FXandFixedIncomeTrading logo, own elaboration

What are the alternatives of trading trends?

If you don’t like to trade trends you should be looking for market neutral strategies.  This kind of strategies are used by hedge funds. It basically consists of hedging. It seeks to avoid the market risk. The way to apply this strategy with futures is with intra-product spreads or inter-product spreads.

FGBM-FGBL Spread

I’ve been looking for a trading strategy like this for a while. I decided to spread the FGBM and the FGBL at the ratio of 3 to 1. I have checked only the charts but they look good to me.

     FGBM-FGBL Dec18, daily, source: TradingView

As you can see it has been moving in range since the middle of June. The range of the spread has been 160 ticks (234.60 and 233) while the bund range has been 291 ticks. I wouldn’t recommend holding overnight positions because these futures can open with a gap.

Conclusion

Sometimes is worth to consider market neutral strategies. Their main advantages are: there are multiple of entries, they are less risky than the outrights, you can consider as an alternative strategy if there is a lot of uncertainty in the market.  Obviously, the ratio 3 to 1 used in the example is random. I could have chosen a different one. Ideally, we should compare the DV01 of these futures and get the ratio from there. On the other hand, you can consider the different volatilities of the products involved or the correlation to get the spread ratio. Also, you should think about the trading commisions and the margins because it’s not the same to trade a 1 to 1 spread than 100 to 200. Having in mind all of these factors is not easy and requires a lot of work. Sadly, after testing the system or the strategy you can be disappointed with the results. Don´t give up and keep trying to improve 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

How the main futures reacted to the Non-Farm Payrolls, US wage growth and US unemployment rate

Introduction

The Non-Farm Payrolls is one of the most important macroeconomic releases of the month. According to my master’s dissertation, it’s the macroeconomic release that has the biggest effect on the markets.

If we look back 10 years, we can conclude that the biggest impact in the markets has been made by the monetary policy applied by the different central banks around the world.

The Figure

I expected a lower figure like the most part of Wall Street analyst… To my surprise, the US added 201000 jobs in August. The previous figure was 157000, so we saw an important increase. The unemployment rate was unchanged at 3.9%. Probably the most important release of the day was the US wage growth. It showed 2.9 % which is a level that we hadn´t seen since 2009. The US economy keeps pushing and probably we will see another rate hike in the next month. Considering this good news we should expect a sell-off on the fixed income futures.

Eurodollar

    Eurodollar Dec18 futures, 15 min, source: TradingView

The positive surprise on the US wage growth and the US Non-Farm Payrolls create an opportunity to sell for the traders.  Maybe you think that 7 ticks are not enough but considering the nature of this product is a big change. You can compare the daily range from the previous days in the chart above.

Fed Funds

    Fed Funds Jan19 futures, 15 min, source: TradingView

The traders reacted in the same way as the case of Eurodollars. It took this future to the previous support at 97.65. Considering the upcoming rise in the US interest rates, I expect this future to keep falling.

10Y T-Note, 5Y T-Note and 2Y T-Note futures

We saw a strong sell-off in the US bond futures. The main difference between them is the range of the movement. Obviously, the longer the duration, the bigger the volatility and the movement range as we can see in the following charts.

   10 Year T-Note Dec18 futures, 15 min, source: TradingView

The 10 Year T-Note Dec18 futures fell 49 ticks. It broke the previous support.

    5 Year T-Note Dec18 futures, 15 min, source: TradingView

Even if the chart seems similar, the 5 Year T-Note Dec18 fell 32 ticks.

    2 Year T-Note Dec18 futures, 15 min, source: TradingView

It fell 11 ticks and again we can see an important move.

An alternative

The main problem of trading the Non-Farm Payrolls is that the liquidity disappears just before the data is released. There is the possibility to execute at a bad price if we enter a market order.  Another problem is that you shouldn’t place a stop loss near the limit order because probably it will be triggered.

The alternative of trading the outrights would be trading spreads. The advantage is that we can trade a bigger position than in the outrights because we are hedged (or at least in part). If we take the spread between the 10 Year T-Note and the 5 Year T-Note at the ratio of 1-1, we can see that movement was only 17 ticks. If we decide to trade this spread and considering positive news for the US economy, we should sell the future that represents the future with longer duration and buy the other one.

Summary

We have seen how a macroeconomic release can affect the markets and how the traders interpret the data and execute the trades.  Nowadays, at least 70% of all the trades are executed by automatic trading systems and they are quicker than the point an click traders so making a profit in this kind of releases is getting really difficult. The only possibility would be position yourself with a small size in the right side of the trade and with a reasonable stop loss. If you don´t want to trade the outright, you can trade the spread. In this case, you need to make sure that you make enough ticks to cover the commission because you have double commissions. 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

Simple trading system, does it work in the Nasdaq?

Introduction

There are so many trading styles and the traders can take their decisions from technical analysis, important levels, value investment, quantitative analysis, price movement, and order book study. Some of them combine more than one method at least to have another point of view or to have another idea generation source.

Nowadays, it's easy to find resources for trading. There are plenty of resources online, such as videos and courses. If you are more traditional, you can search for books and see what the people are saying about them.

Some of the most successful traders are known for being contrarians. What does this mean? Maybe they are aware of how powerful the trends could be, however, they are not investing for the long term. They are looking for a quick profit in a short period of time (depends about the how big is the position, who is executing and what are the targets, it can last from a few seconds to less than 3 months).  How do they act? Basically, if a stock or a future has been raising for a while and has a strong trend, they can consider that the product is overvalued and that it will revert to the moving average or at least it will revert enough to make a profit.

The idea

Now, we know what they do. I always thought about it. One of the problems is the timing when I should enter into a trade like that. There are so many statistical methods that you can apply to that. It can be based on the number of days (imagine that the stock has been raising for the last 60 days and you think that every “X” days, there is a retracement), it can be based on the price change (that you can consider it overvalued), it can be a combination of both. We can see that creativity is another part of the trading research. Probably, I will write a post about the whole process in the future but today we are going to review a simple idea.

The trading system is contrarian so it will consider yesterday % change. If yesterday the stock or the underlying product went up, the system will sell it today. And the other way round, if the stock fell yesterday, the system will buy it today.

Nasdaq

I’ve chosen the Nasdaq index as an example. It represents the technology stocks.

    Nasdaq continuous future, daily, source: TradingView

It hasn’t stopped rising since 2010. I wanted to show the period 2014-2018 that I will study in this article. Considering the strong bullish trend maybe I shouldn´t use a contrarian system. I will show you that one of the most important aspects is the risk management (always combine with a profitable system)

Backtest example

Before we start, I need to explain a couple of things. In my opinion, the market behaves differently when it goes up than when it goes down. The falls usually are very sharp. This is why I decided to choose a tighter stop for the sells. I’ve chosen the stops randomly, the buys have a stop of 4 ticks and the sells have a stop of 2 ticks. Let’s check the results:

                                        Backtesting, own elaboration using R

Good news! The mean is positive which is a good starting point. However, making $9.53 per trade is not enough without considering fees and slippage. The system makes $2190 on the best day. The worst lost is $20. The kurtosis is really high because all the values are concentrated around 0. To be honest, the system only makes money on the 3% of the trades. So it’s not tradable even if it makes 103.65% in four years. It would be great if the system had more entry requirements and the number of trades would be reduced. That way the statistics would improve a lot. The Sharpe ratio isn’t great. 

                                                           Max drawdown, own elaboration using R

Considering that the trading system loses in 97% of the trades, the max drawdown is very good. Obviously, each time that it loses, the amount is very small (around 0.2% of the portfolio)

Trading strategy performance, own elaboration 

We can see the characteristics of the system. A few profitable trades and a bunch of losing trades. The probability of taking the loss is very high with our tight stop losses. In other hand, every time that we are right, we make a lot of money.

Sum up

Sadly, there isn’t a good conclusion for this post. I think that I have a lot of work to improve this system.  In addition, this is not a professional way of running a backtest. We should have a period of time in which we test our idea, another period for optimization and different windows of time to test the optimized parameters. Also, we should always consider broker fees and slippage. The system shown is not tradable but it shows that a sounding risk management system is very important. Another idea that we should take from this post is that even a contrarian system can perform in a market that has a clear trend. 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

Eurodollar, looking to the year to date behaviour and the spreads

Introduction

I consider that we should follow the central banks' steps. It´s very useful to adapt your strategies to the economic policy applied and the central bank recommendations. This applies more to investing in a medium to long-term that for day trading. However, it can be interesting to test a trading system with a variable that tracks if the central bank is bullish on the economy or if it has a negative outlook. Today, I will focus on the Eurodollar futures situation.

Outrights

According to the Fed’s positive outlook on the US economy and due to the accelerating growth and rapid job creation, it’s expected that we will see two more interest rate rises this year. With this scenario, the futures should be falling at least  the  next expiries (December 18 and March 19)  

    Eurodollar Dec18, Daily, Source: TradingView

The front-month contract has behaved as expected during the last year. However, the uncertainty about the trade war between US and China has stopped the bearish trend.

    Eurodollar Dec19, Daily, Source: TradingView

This chart is similar to the previous one but this contract is more volatile. 

   Eurodollar Dec20, Daily, Source: TradingView

Again, the volatility is higher for this contract because it expires 1 year later than the previous one.  It closed at 97.06 which implies a lower interest rate than the Dec 19 contract. we will see later how this affects to the interest rate curve.

    Eurodollar Dec21, Daily, Source: TradingView

This contract is more interesting for trading purposes because the daily range his higher and it can offer more opportunities to go in and out.

Comparison

   Comparison Eurodollar Dec18-Dec19-Dec20-Dec21, Daily, Source: TradingView

In this chart, we can see the differences between the 4 contracts showed before. Probably, one of the most interesting aspects of this chart is that the closest expiry shows a smoother price than the other price. This is related with the volatility. At the beginning of the year, the contracts were trading as expected with widen spreads however the trade wars speculation from the middle of May has made the contracts to converge and the spreads have narrowed.

Spreads

    Eurodollar Spread Dec18-Dec19, Daily, Source: TradingView

We can see that that the spread Dec18-Dec19 widened in the first three months of the year and after that, it has been in the range 0.28-0.40. The main resistances for me are 0.38 and 0.40. The highlighted in yellow shows the reversal of the spreads due to the trade wars and the FOMC meeting that showed certain worries about the economy overhitting. The Fed officials didn’t give any indication about how willing they were to speed up the pace of interest rate increases. They weren´t worried about allowing the inflation to rise above 2% for a temporary period as far as the economy would expand. You can see this reversal in the previous charts as the eurodollar futures rallied on these days. 

   Eurodollar Spread Dec19-Dec20, Daily, Source: TradingView

In contrast to the last graph, we can see that the spread has narrowed and this means that the interest rate curve is flattening.  The closing price of -0.02 implies that the 3-month interest rates will be lower in 2020 than in 2019.

   Eurodollar Spread Dec20-Dec21, Daily, Source: TradingView

We can see the same pattern that the Dec19-Dec20 spread has. Again it implies that the 3-month interest rate will be lower in 2021 than in 2020. This can be temporary but in my opinion, it means that the US economy probably will slow down in the medium term. According to the spreads, it should happen in 2019-2020.

Sum up

We have seen some of the Eurodollar futures. We can see that the front months are moving in a different way than the back months. This implies narrow spreads and finally, an interest rate curve flattening. The ongoing uncertainty about the trade wars will continue. As far as the US economic growth continues and the labor data keeps as good as it is, the Fed will keep the interest rate increases expected. Hopefully, the Fed will act independently even if Donald Trump puts pressure to change its monetary policy. I don´t think that the international issues will affect to the US economy at least in the near term, however, we need to keep an eye on Argentina and Turkey. I hope you like it. Thanks.

Have a good trading!!

#trading #interestrates #Fed #inflation #US #macro #economicgrowth #eurodollar #GE #ED #spreads #opinion

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