A simple strategy for trading commodities and financial futures. This will be misrepresented as “trend following”, but really I think it’s just a way to take advantage of the fat tails that occur in almost all markets. I’ve traded similar stuff for close to 20 years now; Chicago board of trade member (now CME group). Got quite the spanking last 2 weeks in the markets, as I watched everything seemingly become correlated (how does cocoa, soybeans, New Zealand dollar and the Nasdaq move together for Christ sake?)
The strategy:
Buy X contracts at the highest high over the last 250 trading days (about 1 year)
And go short X contracts at the lowest low over the last 250 trading days.
Note the strategy always has a position.
Risk:
X is determined by how much you actually want to risk per commodity. For illustrative purposes, I’ll use $200,000. This may be unreasonable, but it can be scaled down to whatever you want.
Formula for X: $200,000/ ((highest yearly high – lowest yearly low)*pt value)
Example: You want to risk $200,000 on the direction of corn. The yearly high in corn is $4.70, yearly low is $2.81. pt value is 5000 bushels per contract, or $50 per penny.
=$200,000/((470-281)*50)) = $200,000/$9,450, or ~21 contracts of corn.
X=21.
If you only wanted to risk $20,000, you’d only buy/sell a 2 lot of corn.
If corn were to trade at $4.70 tomorrow, the strategy says buy. If it were to trade at $2.81, sell.
Data:
Continuous contracts. Positions are held for years, and the portfolio & price history must be maintained with rolling.
Results:
[all results were are in picture format from excel, don’t know how to post a table]
45 markets which I have data from. Data is from 1959 or inception.
Legend:
Type: umm.. type of commodity
Symbol: Symbol used for tradestation
Since: 1st year of data
CurrP: Current position
Closed: Closed out profit (loss)
Open: Open profit (loss)
#trds: number of trades
#cts: Total # of contracts traded
Profit/Ct: Amount of Profit per contract traded.
This table above shows results of all 45 contracts since market inception or 1959. The average profit per contract is $2,208.80. From there, it is necessary to take out commission and “slippage”. But, as a bonus, the account holder gets to add in the interest accrued on the account via T-bills used as collateral. The total net effect is actually positive, more is earned in interest than paid in commission & slippage. This is even getting better with electronic and tighter markets.
There were 690 trades over 1292 (approx) trading years. So, on average the strategy had a trade about every 2 years per market. Pretty boring.
However, over those 1292 (again approx) years, the strategy made $82+ million dollars (no compounding). On average, risking $200,000 per market this strategy made $63,571 per year per market.
If someone were to take a $100,000 account, and trade 5 different random markets, risking ‘only’ $20,000 each, that person would have made $6,571 in each market on average per year, for an annual return of nearly (6571x5/100,000), or 33%.
For those who think all these results were created during the high inflation days of the mid 70’s, I’ve included a table of just the previous 10 years.
It’s profit per contract actually increased to $3,112.10. Some of this can be accounted for with larger new contracts, but the point is – the strategy still worked. The average per market per year was still over $60k while risking $200,000 per trade.