Fully automated futures trading

Raphael said:
So it seems like you're estimating trading costs using this approach. There are a few things I can't follow here:

  1. The trading costs are in terms of normalized turnover. I thought this turnover was volatility normalized, but from what you've written above the turnover seems to be normalized by the average absolute number of blocks held. Is the average absolute number of blocks held equal to the volatility?
  2. Wouldn't it just be simpler to price in the cost of trading directly in the account currency, e.g. if 300 blocks of an instrument are bought on a particular day, and the cost per block is $8, then just subtract 300*$8 from the account value at the end of the day in the back test. What advantage does using the normalized turnover and standardized cost have over this simple approach?
More...

The normalisation is by a position with a forecast of +10 (the most accurate way) will depend (inversely) on the volatility. So on a particular day the position with a forecast of +10 might be 7 contracts. But if volatility halves it would be 14 contracts.

To put it another way, if I am trading 1 contract a day with a +10 forecast position of 7 contracts, then all other things being equal I should be trading 2 contracts a day if volatility halves.

Using the average absolute position (or a moving average of it) is an approximate for using the position with a +10 forecast. Over long periods of time, if volatility is stable, it should be correct (since everything should be scaled so that you average absolute position is the same as it would be with a fixed forecast of +10). Again your average absolute position will depend inversely on volatility.

The advantages of using a standardised approach are:

- you can subtract the cost estimate directly from the sharpe ratio. This means you can say instantly what proportion of your raw sharpe is being eaten by costs.
- you can compare costs across instruments and across trading rule variations
- you can pool turnover estimates from different estimates in deciding how fast a particular variation is trading
- you can compare costs across time.

GAT
 
I think I understand where my confusion is coming from. I've been calculating the normalized trading cost (standardized cost * turnover) for each instrument, and then adding it up across the instruments in the portfolio.

Now I'm thinking that since the instrument trading cost is normalized it is independent of the position for that instrument, that is if we double the position the turnover does not change. So in order to compute the cost for the entire portfolio one should actually take the weighted sum of the normalized trading costs (standardized cost * turnover), using the portfolio weights. Is that correct?
 
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Raphael said:
I think I understand where my confusion is coming from. I've been calculating the normalized trading cost (standardized cost * turnover) for each instrument, and then adding it up across the instruments in the portfolio.

Now I'm thinking that since the trading cost is normalized, in order to compute the cost for the entire portfolio you should actually take the weighted sum of the normalized trading costs (standardized cost * turnover), using the portfolio weights. Is that correct?
More...

Exactly right - but you also need the Instrument diversification multiplier (IDM)

So suppose you have costs in SR units of 0.05 and 0.02 for two instruments with instrument weights of 40% and 60%, and an IDM of 1.2

Then your portfolio cost is

.4*0.05*1.2 + .6*.02*1.2 = whatever

GAT
 
Thanks. That's much clearer now.

So if I understand correctly more diversification means lower volatility, so to maintain the same level of volatility (e.g. to stay at half-Kelly) we will have to trade more contracts. This in turns means higher trading costs.
 
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Raphael said:
Thanks. That's much clearer now.

So if I understand correctly more diversification means lower volatility, so to maintain the same level of volatility (e.g. to stay at half-Kelly) we will have to trade more contracts. This in turns means higher trading costs.
More...

Yes more diversification means a lower portfolio level volatility, unless you leverage things up to compensate. A more leveraged portfolio costs more to trade. One of the few disadvantages of volatility :-)

GAT
 
globalarbtrader said:
Yes. I would put perhaps half my portfolio in a long only (or what I call the 'one rule' rule in my book) investment in "things that I expected to produce a positive return:" equities, bonds, short vol, perhaps some gold as an inflation hedge.

GAT
More...

Would you consider doing this when computing the combined forecast i.e. making a long only rule and then including that in the portfolio of rules?
 
Thanks! Do you have any thoughts on arithmetic vs. geometric means and standard deviations when computing Sharpe ratios and for position sizing?

If a geometric standard deviation is preferred how is this used together with an exponentially weighted moving standard deviation for position sizing?
 
Raphael said:
Thanks! Do you have any thoughts on arithmetic vs. geometric means and standard deviations when computing Sharpe ratios and for position sizing?

If a geometric standard deviation is preferred how is this used together with an exponentially weighted moving standard deviation for position sizing?
More...

For Sharpe Ratios I use the arithmetic mean of % returns.

For position sizing vol calculation I use an ewma (arithmetic means).

To be honest I've never considered using geometric returns. I think over the relatively short time periods we're talking about it wouldn't make much difference; but I understand the properties of arithmetic returns pretty well so I probably won't change.

GAT
 
Monthly update (last one was 5th October).

Down about 8.8% of capital, or £35K. So no new HWM.

This is line with CTA performance across the board; eg Man AHL diversity GBP is down 4% on roughly half the volatility target.
figure_1.png

(picture is a few days old but not much has happened)

Drawdown: 12.6%

Gainers:

Gas £12400
BTP £2600
SP500 £2500
NASDAQ £1100

Loser:

Platinum £5000
Crude £4400
Leanhog £4200
Livecow £3800
GBP £3200
Eurodollar £2900
MXP £2300
NZD £1700
US2 £1200
AUD £1100
US10 £1100

plus £17K down in 'hedged' equity long only portfolio

"The big short" in Gas; my largest position, helped stem the bleeding that occured elsewhere.

Positions:
Code: 
       code contractid  positions   Lock WrongContract InFwdNotRoll
16      AEX     201511          1  False         False        False
4      BOBL     201512          2  False         False        False
26      BTP     201512          2  False         False        False
11      CAC     201511          1  False         False        False
18   COPPER     201512         -2  False         False        False
17     CORN     201612         -3  False         False        False
13  CRUDE_W     201612         -2  False         False        False
15  EDOLLAR     201903          3  False         False        False
24  EDOLLAR     201812          9  False         False        False
19      EUR     201512         -2  False         False        False
25  EUROSTX     201512        -13  False         False        False
5    GAS_US     201601         -5  False         False        False
8      GOLD     201512         -1  False         False        False
10      JPY     201512         -3  False         False        False
23    KOSPI     201512          1  False         False        False
14     KR10     201512          2  False         False        False
12      KR3     201512         10  False         False        False
20  LIVECOW     201610         -1  False         False        False
7       MXP     201512         -3  False         False        False
21   NASDAQ     201512          1  False         False        False
27     PLAT     201601         -1  False         False        False
0       SMI     201512          1  False         False        False
3   SOYBEAN     201611         -2  False         False        False
9     SP500     201512          1  False         False        False
1       US2     201512          3  False         False        False
22      US5     201512          1  False         False        False
2       V2X     201512          4  False         False        False
28      VIX     201512         -1  False         False        False
6     WHEAT     201612         -2  False         False        False


Risk:
Code: 
Expected annual risk more than GBP6400 per year, GBP400 per day
       code  multisignal  expected_annual_risk  expected_annual_risk_per_contract  position  expected_annual_risk_rounded_pos
20      CAC          9.9                  6431                               7448         1                              7448
18    KOSPI         12.4                  8057                               8015         1                              8015
23    SP500         16.8                 10947                              10017         1                             10017
21      SMI         10.1                  6543                              10308         1                             10308
19      AEX         12.6                  8221                              13423         1                             13423
8       BTP         23.3                 15129                               7657         2                             15314
36  EDOLLAR         26.6                 17274                               1512        12                             18141

22   NASDAQ         14.9                  9715                              10361         1                             10361
2   LIVECOW        -10.2                  6612                               5001        -1                              5001
33     PLAT        -12.5                  8145                               7236        -1                              7236
3   SOYBEAN        -16.7                 10878                               4017        -2                              8033
27      JPY        -16.4                 10677                               4563        -2                              9127
25      EUR        -25.7                 16749                              10817        -1                             10817
31     GOLD        -17.0                 11041                              11581        -1                             11581
30   COPPER        -24.4                 15896                               8730        -2                             17460
34  CRUDE_W        -27.8                 18090                              11206        -2                             22412
35   GAS_US        -33.8                 21998                               4771        -5                             23857

As noted above Gas is still my largest position, though I'm also short Crude.

Trades:
Code: 
         code contractid     filled_datetime  filledtrade  filledprice
7258      AEX     201511 2015-11-03 08:03:33            1   463.800000
5920      AUD     201512 2015-10-09 11:37:46            1     0.731800
5998      AUD     201512 2015-10-22 06:47:16           -1     0.717900
6004     BOBL     201512 2015-10-22 14:46:40           -1   129.460000
7219     BOBL     201512 2015-11-02 08:33:42           -1   129.340000
7222      BTP     201512 2015-11-02 08:36:03           -1   138.260000
6016      CAC     201511 2015-10-27 08:00:26            1  4886.000000
5944   COPPER     201512 2015-10-14 18:14:14            1     2.414500
6529   COPPER     201512 2015-10-27 17:15:21           -1     2.361000
7270     CORN     201612 2015-11-03 15:19:35           -1   404.750000
5908  CRUDE_W     201512 2015-10-07 12:12:48            1    50.090000
5956  CRUDE_W     201512 2015-10-19 12:02:24            1    47.240000
5959  CRUDE_W     201612 2015-10-19 12:02:24           -1    52.200000
5995  CRUDE_W     201612 2015-10-21 16:10:31           -1    51.020000
7237  EDOLLAR     201812 2015-11-02 12:24:19           -1    98.015000
5911      EUR     201512 2015-10-08 08:52:51            1     1.130000
6010      EUR     201512 2015-10-23 06:15:13           -1     1.110500
7276      EUR     201512 2015-11-04 01:38:19           -1     1.095300
7225   GAS_US     201512 2015-11-02 12:09:19            4     2.252000
7228   GAS_US     201601 2015-11-02 12:09:19           -4     2.428000
7231   GAS_US     201512 2015-11-02 12:12:09            1     2.252000
7234   GAS_US     201601 2015-11-02 12:12:09           -1     2.427000
5905      GBP     201512 2015-10-07 06:39:49            1     1.523900
5917      GBP     201512 2015-10-09 02:13:50            1     1.535500
5941      GBP     201512 2015-10-14 18:07:20            1     1.545200
7135      GBP     201512 2015-10-29 02:06:17           -1     1.526100
7207      GBP     201512 2015-11-02 01:30:39            1     1.542700
7264     GOLD     201512 2015-11-03 12:06:42           -1  1131.600000
5902      JPY     201512 2015-10-07 04:59:31            1     0.008349
6007      JPY     201512 2015-10-22 17:30:22           -1     0.008289
6013      JPY     201512 2015-11-01 18:37:04           -1     0.008257
7279      JPY     201512 2015-11-04 13:43:21           -1     0.008241
5980    KOSPI     201512 2015-10-20 02:42:56            1   249.100000
7204     KR10     201512 2015-10-29 03:05:27            1   126.580000
7216     KR10     201512 2015-11-02 01:43:36           -1   125.960000
6706      KR3     201512 2015-10-28 01:55:52            1   109.730000
5935  LEANHOG     201606 2015-10-13 14:10:50            1    81.400000
5989  LEANHOG     201606 2015-10-20 14:27:43           -1    79.525000
6370  LEANHOG     201606 2015-10-27 14:18:46           -1    77.000000
7249  LEANHOG     201606 2015-11-02 15:05:23           -1    76.150000
7285  LEANHOG     201606 2015-11-04 14:21:48           -1    74.775000
5977  LIVECOW     201610 2015-10-19 16:09:13            1   132.575000
5914      MXP     201512 2015-10-08 16:34:46            1     0.060230
5947      MXP     201512 2015-10-15 02:19:14            1     0.060580
6343   NASDAQ     201512 2015-10-27 14:00:41            1  4623.500000
5899      NZD     201512 2015-10-07 02:04:24            1     0.651000
5938      NZD     201512 2015-10-14 08:47:01            1     0.669800
5992      OAT     201512 2015-10-21 07:35:44           -1   151.630000
6001      OAT     201512 2015-10-22 07:32:45            1   152.370000
7240      OAT     201512 2015-11-02 12:39:52           -1   152.520000
5923     PLAT     201601 2015-10-12 13:55:40            1   995.900000
7252      SMI     201512 2015-11-02 15:03:00            1  8939.000000
5929  SOYBEAN     201611 2015-10-13 12:02:12            1   899.250000
6241  SOYBEAN     201611 2015-10-27 12:28:54           -2   891.000000
7132  SOYBEAN     201611 2015-10-28 17:05:52           -1   887.000000
7255  SOYBEAN     201611 2015-11-02 15:59:59           -1   887.000000
5983    SP500     201512 2015-10-20 14:08:39            1  2023.250000
7273     US10     201512 2015-11-03 17:32:53           -1   127.109375
5926      US2     201512 2015-10-12 14:18:50            1   109.539062
6337      US5     201512 2015-10-27 13:59:50           -1   120.578125
5950      V2X     201511 2015-10-19 09:39:44           -3    23.250000
5953      V2X     201512 2015-10-19 09:39:44            3    21.550000
7129      VIX     201512 2015-10-28 16:31:53           -1    17.100000
7267    WHEAT     201612 2015-11-03 13:12:23           -1   537.000000

Slippage £146 vs £320 expectations. I'm seriously considering running my execution algo as a standalone scalping system (on a small number of markets with very limited risk). It will be interesting to see if this cruddy slow thing can really still make money in the world of HFT when it isn't attached to a much slower trading system. That little project will have to wait until I've refactored my code; something I am putting off for as long as possible.

GAT
 
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