Futures Markets

[JulianCohen]

I have had a couple of people ask me about futures trading as I am running a futures Trend Following system alongside my Stock systems. I have been running it since mid 2014. The stocks I have been running since mid 2016.

So here are my thoughts on futures, partly taken from an email reply to one of the forum members here on this subject.

I used Trading Blox to test and build my futures trading system. I couldn’t code at the time I did this so I had the developer of Trading Blox write the system to my specifications.

I had a good chat with Nick about using Amibroker a while ago as I was thinking of redoing it all in that, but his opinion is that it doesn’t handle portfolios of futures contracts well, if at all. It is fine for one contract but not for a whole portfolio, something Trading Blox was built for.

Now I am not sure that futures are suitable for mean reversion systems, although the stock index contracts probably are. So I have a trend following system which I have been trading since mid 2014. The first year it did spectacularly well and I thought I was a walking trading god. Since then it has done nothing and I am in drawdown for over a year. So are most of the best CTA trend followers so I’m in good company but I have to tell you it is hard. Very hard. Last month I thought about cutting it. I won’t but that will give you an idea of how painful it can be. 

However if you really want to have exposure to futures there is a solution, something I am thinking about switching to myself.

Equinox run three CTA mutual funds. They have chosen three legends of the CTA universe, Parker, Campbell and Crabel.

https://equinoxfunds.com/strategies/single-strategy-mutual-funds/equinox-chesapeake-strategy-fund

https://equinoxfunds.com/strategies/single-strategy-mutual-funds/equinox-campbell-strategy-fund

https://equinoxfunds.com/strategies/single-strategy-mutual-funds/equinox-crabel-strategy-fund

Campbell and Chesapeake (Jerry Parker) are Trend Followers and Crabel is a mean reversion strategy. I am thinking of just holding a combination of the three. I would do it as Buy and Hold. You could probably set up a watchlist and actually trade them according to your own recipe if you wanted to but either way you have a relatively easy access to three of the best CTAs. I looked on IB and you can buy them through the fund section of the order ticket which you have to enable in permissions.

One other one to look at. HTUS which is a stock ticker. This is Hull Trading and his S&P stock fund. He is another Market Wizard legend.

I just thought this might be a great way to add these CTAs into your portfolio without the hassle of trading futures and all this entails: watching for the contract rolls, watching for when they change the tic values, paying high execution fees, diversifying across a number of markets and currencies etc etc…

[Nick Radge]

Thanks Julian and very wise words.

I think Winton also has a mutual fund, although it may be UK domiciled.

Crabel runs a very low vola strategy using many systems on very short time frames, including intra day.

[SaidBitar]

Thanks Julian, very insightful description
I just have few comments / questions

1- I totally agree that Amibroker was built around Stocks but i think it can be also used for Forex and Futures. It is not as straight forward since you need to carer about tick size, lot size, currencies for each future but once it is done then things can be easy afterwards.

2- Futures Counter Trend this is a link to another post in the forum for counter trend strategy on futures maybe you can play around with it and check if it will add any value

[JulianCohen]

Said Bitar wrote:

Thanks Julian, very insightful description
I just have few comments / questions

1- I totally agree that Amibroker was built around Stocks but i think it can be also used for Forex and Futures. It is not as straight forward since you need to carer about tick size, lot size, currencies for each future but once it is done then things can be easy afterwards.

2- Futures Counter Trend this is a link to another post in the forum for counter trend strategy on futures maybe you can play around with it and check if it will add any value

Thanks Said. I actually use Clenow’s counter trend as part of my system. It is half trend and half counter trend and set up so you can’t take a signal from the same futures contract in system “trend” if the “counter Trend” is already being held, or vice versa.

I believe that the problem with Amibroker for futures is that it doesn’t work well on a portfolio basis. Single contracts are fine. Also it would mean writing all the code for the correlation matrix, which would be beyond my capabilities.

[ScottMcNab]

I think there was some talk a while back on the forum about using ETF’s in Amibroker backtests…based on what you have posted Julian perhaps ETF’s may offer us exposure to commodity/financial markets in a manner we could learn more easily using Amibroker backtesting techniques that have applied to stocks ? Ideally, we would take an existing system (eg rotational) and apply it to a basket of ETF’s and voila….

Will add it to the list

[JulianCohen]

Scott McNab wrote:

I think there was some talk a while back on the forum about using ETF’s in Amibroker backtests…based on what you have posted Julian perhaps ETF’s may offer us exposure to commodity/financial markets in a manner we could learn more easily using Amibroker backtesting techniques that have applied to stocks ? Ideally, we would take an existing system (eg rotational) and apply it to a basket of ETF’s and voila….

Will add it to the list

In principle yes, but in practice it’s a little more difficult. The ETFs don’t have much of a data history as most have only been running a few years, and you also have to look very carefully to make sure that the ETF you choose is actually holding what you think it should be holding. SPDR or SLV are fine, they are also super liquid, but exposure to wheat, corn, soybeans, oil etc is a bit more challenging

[ScottMcNab]

Yeah..the devil is in the detail….I would not do it outside of mentoring program as my chances of not missing a crucial factor would be zero…not sure if Nick trades ETF’s….if not then that is probably the first red flag

[JulianCohen]

Scott McNab wrote:

Yeah..the devil is in the detail….I would not do it outside of mentoring program as my chances of not missing a crucial factor would be zero…not sure if Nick trades ETF’s….if not then that is probably the first red flag

Well when I have a bit of time….which is always, but what I mean is when I can be arsed I’ll go through and make up a list of commodity ETFs. It is a good thing to do anyway as I keep on meaning to do it.

I’ll set up a topic and post it in there so we can all check it out and pick it apart. best to have a few eyes on it so we can come up with a list of good strong ETFs that we can all use if we want to.

[JulianCohen]

Just as an example read through this

https://www.google.com.au/amp/www.cnbc.com/amp/2016/08/25/snake-oil-why-the-3-billion-dollar-uso-etf-is-down-this-year-even-as-crude-has-surged.html

[Anonymous]

I did an exercise of finding ETF’s that cover a broad range of asset classes a few years back. If I remember correctly finding ETF’s in the softs / grains and a few others that had history and liquidity was the challenge (as Julian has pointed).

Another challenge was finding an ETF that is closely correlated to the underlying futures contract that one would like to replace. The ETF’s seem to have a number of different components unlike the futures, wheat for e.g. is “XYZ” (whatever it is) whereas the ETF may have wheat from different regions, countries etc which will give it a very different profile.

I will try and find that list and add to the thread.

[ScottMcNab]

Interesting article Julian..many thanks

[RobGiles]

That’s an interesting article Julian. Basically commodity tracking ETFs only have a chance of paying off from the long side if the futures market curve for the underlying is in backwardation (the opposite to contango. an inverse futures curve). This only happens when you see as acute shortage of the physical commodity and the front of the futures curve goes into a massive bullish, usually parabolic move. I’ve seen this happen in the Ags many times (its more prone to happening with Ags / Softs as there can be a complete supply side failure). Long only funds are then selling the front (spot) month (at a profit) and buying spot + 1 as the front month approaches the delivery window (they never want to take physical delivery). If the acute shortage of supply continues , then you’ll see the fund (ETF) make money. All other times, when the supply / demand is in balance or oversupplied, the problem of a normal carry market will be apparent – advantageous to those holding the short side of the market (i.e. hedgers, or short side speculators) as they close out their front end positions (buying) and roll them to spot +1 (selling higher). This is how grain storage handlers make a lot of their money. The funds (ETFs, long only hedge funds etc) get screwed.

[JulianCohen]

Yup exactly. It also means that unless you understand this, you will get screwed buying most futures based ETFs because you are not getting what you think you are buying.

That’s why I’m thinking that the CTA mutual funds are a better way to have exposure to the futures markets. Let the pros handle all the rolls and the different currency exposures. You can be secure with Cambell and Chesapeake as you know and agree with their core Trend Following ethos. Crabel is a mean reverter and also conservative so the fact he is now -7% is a huge drawdown for him. I’m sure he wouldn’t be that deep for long

[SaidBitar]

I have no experience/idea about this so maybe what i will say is complete nonsense but if the ETF is tracking the exact performance of the CTA why would people put their money in CTAs and pay management fees and performance fees if they can get the same if not better by trading the ETF of the CTA. What i want to say it sounds like a bad trade for the CTA .

[Nick Radge]

Roll yield is actually a large part f the CTA strategy:

http://www.automated-trading-system.com/crude-oil-contango-and-roll-yield-for-commodity-trading/

[Author]

Posts