Commodity support and resistance strategy

samsin · Oct 30, 2018

Hi All,

I am building a support & resistance strategy on financial, commodity and FX futures (total 20 futures). S&R is defined as maximum and minimum prices in the last 50 days. The assumption is when today's price hits the resistance, next day's price will go down and when today's price hits the support, next day's price will go up.

The backtested results are not great and when I analyzed each futures separately then I noticed that around 40% of the futures are following the completely different logic i.e. next days price goes up when today's price hits the resistance and next days price goes down when today's price hits the support. Now, I have two options -

1. I remove the 40% of the futures which are not following the assumption and only trade rest 60%

2. I change the sign of those 40% of futures i.e. go long after hitting the resistance and short after hitting the support.

I am not sure whether option 2 is the right way of doing it. It would be more of a data fitting but option 1 has survivorship bias. When I know which 40% of the futures are producing negative returns then it doesn't make sense to keep it. I am inclined towards option 2 because each futures has different characteristic and can behave in an opposite manner. Can anyone advise what is the best way to approach it?

Thanks,
Sam

bone · Oct 30, 2018

It isn't surprising that your backtested results are not great. You are finding that short term (50 day) S/R levels are being co opted by more powerful longer term market dynamics.

How about Option 3, which is to believe what the data is telling you ?

Handle123 · Oct 31, 2018

Each market seems to have a different "cycle" of so many days, so why you selected "50 days" might not work as one size don't fits all. You might not have done enough decades of testing and you are going to need it so you test over fifteen years to get a feel of the cycle then test over other data to see if it runs true as in out of sequence, cause if you run it all throughout the years of data, you end up with data that pretty much useless into the future. But what you trying to do is Donchian system? When it trends, nothing better, but chop will hurt often.

There is many sites of Donchian Breakout trading system
https://www.bing.com/search?q=donchian+trading+system&FORM=AWRE

If you going to do long term commodities, best is buying support and risking little, sell resistance and risk little. Even better by learning how to hedge. I been trading long term commodities decently since early 1990s but I don't first get in during trends, am more of trying to find limited 9 year extremes, so I have to hedge as I am only correct 15% or less of the time based on the original position commodity futures.

Depending on your time horizon, if you seeking longer term with rollovers, study monthly/weekly data and you can see trends better. Barchart has good free charting.
https://www.barchart.com/futures/major-commodities#/viewName=main
Daily is fine for trying to pinpoint as low as you can to buy or sell, but I find signals better on higher timeframe, but then I will stay in trades for years and doing many rollovers and learn to sell options and do spreads so you can make something waiting for trend to resume or new trend to start.

Good luck, and take your time, no rush to be wrong.

samsin · Oct 31, 2018

@bone and @Handle123 Thanks for your feedback.

After reading your comments, I changed my code to use 250 days and 500 days max and min S&R. I still face the same issue and I don't feel it has to do with just number of days in S&R. If that is the case then at least crude oil and natural gas should follow the same rule but they are completely opposite. I am fine to use different rules for different asset classes (energy commodity, US equity index futures etc) but I find discrepancy within asset classes.

Am I doing anything wrong here?

bone · Oct 31, 2018

samsin said:
@bone and @Handle123 Thanks for your feedback.

After reading your comments, I changed my code to use 250 days and 500 days max and min S&R. I still face the same issue and I don't feel it has to do with just number of days in S&R. If that is the case then at least crude oil and natural gas should follow the same rule but they are completely opposite. I am fine to use different rules for different asset classes (energy commodity, US equity index futures etc) but I find discrepancy within asset classes.

Am I doing anything wrong here?

You seem quite convinced that 1. historical S/R levels offer some sort of optimum trade ENTRY opportunity, and 2. Changing the rules for particular assets on a case-by-case basis in order to make them “behave” according to your preordained construct will hold up in the future.

Personally, I require really good risk/reward for trade ENTRY.

Speaking for myself I indeed use S/R - for trade EXITS. But I wouldn’t trust it for trade entry because I don’t find it to be reliable enough. My 2 cents, YMMV.

Good luck with everything, and I wish you good fortune!