Robotrader2020, algorithmic trading competition

I decided to participate in Robotrader and I believe that is worth to share my experience here.

I consider Robotrader as one of the referents in algorithmic trading education in Spain. It offers a series of lectures or seminars with some of the best professionals in algorithmic trading, investment banking, and technology.  In addition, it holds a competition in which the participants need to create an algo to trade automatically for two months. This is the 10^th edition and it’s been a great so far.

The main purpose is to introduce the world of trading and automatic investing to students and invite them to do it using different programming languages.

I think that it is a great initiative even if you have knowledge about investing in financial markets. It is very difficult to find professionals with knowledge in both areas. To be honest, it helps you to understand how difficult is to try to merge one traditional area like trading with technology. Obviously, it depends on each student, some of them will focus on high-frequency trading systems while others will focus in a more traditional trading system.  One of the things that I like the most is that it challenges you on the technology side. I mean, it’s not only programming the algo. It involves making research, try to understand how the markets move, designing the algo, backtesting, optimizing, choosing the right money management system, and putting this in production through a paper trading account. And when you think that you are done…  don’t forget to deal with connectivity because if you don’t connect, the orders won’t be sent to the exchange.

I will be sharing my experience during the competition. It started last week so I have a couple of articles to post.

Finally, I would like to thank the Universidad Politecnica de Madrid (and everyone that is supporting this event) for this initiative.  Please see this link if you want to have a look:

https://blogs.upm.es/robotrader/

Thanks for reading this post. 

US Bond and Interest Rate Futures Spreads, US Interest Rate curve inversion

It’s been a while since my last post. I’ve been busy but I will try to write more frequently. Today, I’m going to talk about US interest rates and bonds. In one hand the US economy is performing pretty well, at least for now. The GDP is good but not as the government promised. The employment is strong but the figures show that it’s been driven by part-time jobs and this doesn’t help in the long term. The bank earnings usually reflect the economic performance, and they have reported better than expected profits. On the other hand, the Federal Reserve is tightening. The debt hasn’t been reduced. The protectionism won’t help. This is not new and I believe that you have already read about this.

Fed’s Williams warned earlier this week that the yield curve inversion can be seen as a warning signal. An inverted curve has always been a recession signal.

How can we understand if the curve is flattening or steepening?

Basically, if we simplify the process and we only do the yield difference between 2 different products or the same product with different maturities. If the difference grows over the time, the curve is in a steepening process. If the difference decreases, we will see the curve flattening. Once we understand this we can have a look at different markets:

US Bond Spreads

    5Yr T-Note  - 2Yr T-Note futures spread, Barchart 

In this case, I’ve chosen the price difference between the 5 Yr T-Note and 2Yr T-Note futures. It’s not as intuitive as if I had taken the yields but it’s easy to understand. Obviously, an investor would look for a higher return on a long duration investment than in a short duration investment. If I have 2 assets with a different duration that offer the same return, I will choose the short duration asset. The reason behind this is that I would be able to compound the returns. When there are good news and the economy is doing well, the traders sell the bond futures and considering that the longer duration is more volatile the spread between them will increase. In our case, we can see that the 5Yr-2Yr spread is decreasing.

    10Yr T-Note  - 2Yr T-Note futures spread, Barchart 

The 10-2Yr spread is decreasing and it’s very close to the 8 year low (12.71)

3 month Eurodollar futures

     Eurodollar Sep18-Jun19  spread , Barchart 

This is a 6-month spread in which is going up. You can think that the traders are discounting more interest rate hikes during 2018.

    Eurodollar Jun19-Jun20  spread , Barchart 

This is a bigger spread that covers 12 months. It’s more volatile than the previous one and it´s testing an important support. The most interesting thing is that shows how the interest rate curve is flattening between 2019 and 2020. 

   Eurodollar Jun20-Jun21 spread , Barchart 

If you were surprised with the last chart, take a look at this. Basically, the curve is flat between 2020 and 2021 and probably it will be inverted in the coming weeks or months.

Eurodollar quotes 

     Eurodollar futures quotes, CME

I would like to recommend this short article that offers a different perspective with the same conclusion:

https://www.ft.com/content/f24fbc80-431c-11e8-803a-295c97e6fd0b

Highlights and future questions

All the experts are warning about a possible recession between 2020 and 2022 and as we have seen the curve is inverting at this point. How will the central banks react? Will the Fed choose between fighting inflation or the job market? How will the governments try to reduce the debt? What will happen with the private debt? 

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

Why is good to try alternative trading strategies such as spreads?

When we think about trading, the first image we have is Wall Street, Canary Wharf, Frankfurt,  Chicago, Tokyo, Toronto, Singapur, Hong Kong, big investment banks, hedge funds, asset managements.

    Own elaboration

One of the biggest mistakes is thinking about getting rich quickly trading the financial markets. It doesn’t matter how many books you read or how qualified you are. Obviously, it helps but it's not enough. Also, you should consider that you can’t compete with the institutional investors and Banks as they can afford advanced technologies and they employ a lot of people.

The most important thing is risk management. Being focused and learning by doing is very important as well. Maybe you have a full time job and you would like to try to get an extra income from trading. If this is the case, you need to adapt your trading style to your situation. Maybe, instead of doing day trading, you need to look for a medium or long-term strategy.  If you are an individual trader or investor (not professional) I’d recommend the following steps:

1. Choose the market you want to trade with.
2. Making a trading plan and assessing the risk you are willing to take per trade (I wouldn´t risk more than 2% of the portfolio)
3. Adapt the strategies that suit with your current situation, and backtest them if possible (the best way is open a paper trading account) before using real money.
4.  Start trading and adjust the strategies if needed.

Trading is a long tough journey and carries a high risk even more if you use leveraged strategies. These 4 steps are a sum up about the whole process, I think I can make 20 steps or even more but it’s not the purpose of this post.

Spreads

    Source: TradingView, Eurodollar spread GEH18-GEZ18

This is a spread between two contracts of eurodollar interest rate futures. In this example, I’m using the Jun 18 and Dec 18 contract. As you can see it moves really well with less volatility than trading the outright. Let me make it clear with the following capture:

    Source: TradingView, Eurodollar spread GEH18-GEZ18 vs GEZ18

I´ve represented the Eurodollar Dec 18 futures in blue and purple while the spread between Jun18 and Dec18 is green and red. You can’t see the differences in the chart due to the scale but while the outright made a move of 40 ticks the spread move only 14.

The logic between the spread is different from the outright, you are trading the differences between 2 contracts.Basically, you are betting that the difference between both contracts will increase or decrease. 

The advantages of this strategy are:

1.  Less volatility
2. The margin required is less than the one if you trade an outright
3. You can do the spread between 2 different kind of futures (intra spreads, inter spreads)
4. You can take advantage of seassonality in commodities (I will write an article in the future)
5.  There are Exchange traded spreads, that you don’t need a specific funcionality in your trading platform

The disadvantages:

1. You need to know that you are trading the difference between two contracts so the logic is different
2. Higher execution cost
3. You need an autospreader or an specific functionality in your trading platform that is expensive

I hope you like it. I will write about different strategies in the future. Let me know if you are interested in an specific one. 

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 leverages involved