Commodity Strategy (long)

[Tater10]

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.

[kimchi]

I haven't looked at your tables in detail, but this looks like a channel breakout system using year-wide channels.

I've tested similar models using an adaptation of richard Dennis' sytem adopted by his 'turtles'. I didn't have reliable data for commodities going far enough back in history (where did you get your data?), so I primarily used Indices.

Are you trading EOD or does your timeframe allow you to use weekly data?

Many channel breakout sytems use an exit set at around half the entry channel. ie - maybe you use an exit of a breakdown over a 100 day channel for longs and 100 day breakout for shorts. Can you specify your exits?

Also, systems such as this which use a channel of around a month would use stops placed at around 3xATR. If you're trading longer term, how wide are your stops (I'd think up to 7xATR for a year-wide channel). This would mean your position sizes will be small, being limited by the larger initial risk exposure at your entry point.

If you're using a long time-fram such as a year, how do you manage adding to positions?

When I tested these systems I found a success rate of less than a third of trades, yet those fat tails produced 1 or more large winners each year which managed to turn the year into profit. This also led to large drawdowns and many many successive trades without a win making it a difficult system to follow.

[Tater10]

[ QUOTE ]
I haven't looked at your tables in detail, but this looks like a channel breakout system using year-wide channels.

[/ QUOTE ]
Yes, it is a simple channel breakout. I find it interesting that the easiest seems to be the best.

[ QUOTE ]
where did you get your data

[/ QUOTE ]
I get my data through tradestation, their continuous contracts.

[ QUOTE ]
Can you specify your exits?

[/ QUOTE ]
I'm just presenting a no-stop, always in, taking risk system. I'm familiar with all the stops & such. The real risk control is in the position sizing. Currently, a 2 lot per $20k in corn for example. 2 contracts only control $34k.

[ QUOTE ]
how do you manage adding to positions?

[/ QUOTE ]
I don't trade this system specifically. This is, however, a drawback to this type of system. When the system does hit a huge move, the amount of profit is very dependent on what the price action was at the time of entry (less volatile, more contracts, vise versa). You could just keep adding positions every 3-5 ATR to solve this. Of course this increases the overall risk of the portfolio.

[ QUOTE ]
This also led to large drawdowns and many many successive trades without a win making it a difficult system to follow

[/ QUOTE ]
On a risk adjusted basis, the drawdowns & returns are on par with traditional equity indicies.

I don't trade this system specifically, but I do trade a portion of my account this way. I like to think it is like fishing - throw out a bunch of lines, and wait for the big one.

[Fishhead24]

07/31 03:14p CST DJ Bullish Outlook For Dow Jones-AIG Commodity Index -Analyst CHICAGO (Dow Jones)--The outlook for energy, gold and grain prices during the remainder of 2007 looks bullish as strong global demand is underpinning prices, analysts said. China's economic growth and weakness of the dollar are also adding support for commodities, the analysts said at the Dow Jones Indexes-AIG mid-year commodities outlook panel discussion sponsored by CME Group Inc. (CME). "Commodities have continued to expand in the mainstream investing world," said Dan Raab, managing director at AIG Financial Products Corp. AIG Financial Products is a unit of American International Group Inc. (AIG). The Dow Jones-AIG Commodity Index is up 2.27% this year and is estimated to have $38 billion tied to it by the end of the second quarter, compared to $23 billion in January 2006. Investors are looking to commodities as a way to diversify their portfolio, Raab said. Agriculture Corn, soybean and wheat prices at the Chicago Board of Trade are all expected to keep their bullish tones throughout the year as strong world demand and alternative energy sources lend support to prices, said Jack Scoville, vice president of Price Futures Group in Chicago. Wheat is leading the grains with recent prices reaching within $1 of the all-time high of $7.50 a bushel. Strong world demand in the face of adverse weather conditions in both the U.S. and in Europe. If the trends continue, it isn't unlikely that wheat could reach the record high, Scoville said. Tuesday September wheat settled at $6.30. The U.S. is seeing strong export sales in the face of low wheat supplies world wide, and Scoville expects the trend to continue. "I think the U.S. will be a primary source for wheat," Scoville said. "There's a decent chance that we could continue to see this rally move higher." Meanwhile, corn and soybean prices are both getting a boost in prices from alternative energies like ethanol and biodiesel. The demand for corn isn't expected to decrease anytime soon as long as government subsidies continue for ethanol. Scoville expects corn acreage in the U.S. to increase by at least 1 million acres next year. This year's planted acreage is 92.9 million. Earlier this year, corn prices hit more than 10-year highs, but since then prices have fallen from the $4-plus a bushel level. Near-term corn prices should reach seasonal lows around $3 within the coming weeks because farmers held onto their corn in anticipation of higher prices and because the corn acreage in the U.S. came in much higher than expected. But the continuing move toward ethanol is still providing a bullish outlook for corn through the year, Scoville said. CBOT December corn settled Tuesday at $3.42 1/4. "The market assumes the demand for ethanol will only increase over time," Scoville said. Soybeans will also be competing for acreage with both corn and wheat. Soybean prices are expected to stay higher through the year to keep Brazilian producers interested in planting soybeans. Demand for biodiesel will also lift soybeans, Scoville said. Considering the weaker dollar, Brazilian producers need to see CBOT prices of $8.50-$9 in order to make a profit with soybeans, Scoville said. November soybeans settled at $8.57 1/2 a bushel Tuesday. "Soy, for international reasons, will have to stay very strong," he said.

[Fishhead24]

As mentioned before, I recieve numerous emails throughout the day from friends that are farmers..............this is a great tool for investing in grain futures.

Here is an interesting one I recieved today that may be helpful in some capacity for those tackling the grain markets.....................

I sold 40K corn for $ 3.92 harvest delivery. That leaves me with enough storage on the farm to hold the rest of it...for awhile it looked like I might not be able to hold all of it..but this dry weather is eating our lunch right now. The reason I didn't sell more was that at the time the price was high, we were either too wet to get into the fields, or it looked like we might not get enough rain to grow a crop. I believe my strategy is going to pay off in spite of my lack of selling more $ 4.00 corn. We need to use the marketing loan for what it was intended....if you need cash. It's just a matter of waiting it out guys. Store it and hold for spring rally..it's coming. I think beans can easily go to $ 10.00....with another 15 days of 100 degree heat and no rain, our bean yields are going to drop like a rock...double crop will be not worth combining....and the odds of this extended heat and dry weather is pretty much 99%.....My entire farm will go to beans in 08.... The fertilizer and seed companies made their big score in 07....and their price gouging strategy for 08 is going to blow up in their fricking face....With $ 10.00 beans....do you think they can get the corn acres @ $ 3.00????? duh....don't think so. We've got em by the balls if you think about it. I'm going to be laughing all the way to the bank this fall...each one of my cornfields is in a different section - each standing on it's own....which means that my 200 bu/acre early planted corn won't be averaged in with the May planting that is just through pollination and the heat is eating it up...but who gives a crap.....85% RA 150 guarantee @ 4.05....???? This drought and heat may be our best friend in the long run guys....and commercials and funds can KMA. Live is good...Outback is right....$ 100.00 bbl oil.......grain is about to explode

[CrushinFelt]

Fish: No one is actually going to read through those. And way to try and hijack this thread.

Tater, so this strategy makes money when the future "market" period is more volatile than the previous "market period?

Also, is there a way to sort out which trade position in each case was the one that made you the money? I'd like to see what percentage of the time it was either the long-the-high or short-the-low position that made money. Maybe you put that in your post; if you did I'm sorry I'm at work and don't want to take the time to read the whole thing.

[Fishhead24]

Crushin--the very best way to win in the commodity markets is to stay abreast of the latest, the very latest, news on a particular commodity............news that the majority of traders are not aware of. Getting info from those involved in the industry directly is a huge advantage.

By the way, expect corn futures to drop on Monday after reports of adaquate much needed rain throughout the upper midwest.


Email today(this is not privy info, but it is relevant to what is happening in the fields producing beans and corn)......


Fish,
We recieved here in North Central Iowa 1.6 inch. I know at least 4 county recieved that or more. Could not of come at better time. Corn will finish nicely and beans could be a record producer. Heat will just help us move crop to the finish line now.

[DcifrThs]

[ QUOTE ]
Crushin--the very best way to win in the commodity markets is to stay abreast of the latest, the very latest, news on a particular commodity............news that the majority of traders are not aware of. Getting info from those involved in the industry directly is a huge advantage.

By the way, expect corn futures to drop on Monday after reports of adaquate much needed rain throughout the upper midwest.


Email today(this is not privy info, but it is relevant to what is happening in the fields producing beans and corn)......


Fish,
We recieved here in North Central Iowa 1.6 inch. I know at least 4 county recieved that or more. Could not of come at better time. Corn will finish nicely and beans could be a record producer. Heat will just help us move crop to the finish line now.

[/ QUOTE ]

how does this "much needed" rain affect your earlier prediction of super high corn prices by year end?

also sounds like mother nature has thwarted your prediction of an insanely dry season.

Barron

[eastbay]

[ QUOTE ]

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%.


[/ QUOTE ]

What's the leverage on your $100k resulting in 33% return?
What's the max drawdown peak to valley?
Has this strategy been performing better or worse over time?

Your notion of "risking $X" seems to assume that the commodity will not move further than the current yearly hi to lo. Does that hold true?

With a Monte Carlo technique on daily returns from backtesting, what is the risk of ruin on $100k with your sizing scheme?

eastbay

[Fishhead24]

[ QUOTE ]
[ QUOTE ]
Crushin--the very best way to win in the commodity markets is to stay abreast of the latest, the very latest, news on a particular commodity............news that the majority of traders are not aware of. Getting info from those involved in the industry directly is a huge advantage.

By the way, expect corn futures to drop on Monday after reports of adaquate much needed rain throughout the upper midwest.


Email today(this is not privy info, but it is relevant to what is happening in the fields producing beans and corn)......


Fish,
We recieved here in North Central Iowa 1.6 inch. I know at least 4 county recieved that or more. Could not of come at better time. Corn will finish nicely and beans could be a record producer. Heat will just help us move crop to the finish line now.

[/ QUOTE ]

how does this "much needed" rain affect your earlier prediction of super high corn prices by year end?

also sounds like mother nature has thwarted your prediction of an insanely dry season.

Barron

[/ QUOTE ]


Many parts of the country are very, very dry.......drier than many are aware.