What does volume have to do with the profitability of this specific strategy?
Rob
Fully automated futures trading
- Thread starter globalarbtrader
- Start date
What does volume have to do with the profitability of this specific strategy?
Rob
Nothing. I just assumed big banks would buy at low and sell at high in Euro futures which might turn out to be less directional than the other currency pairs. But yeah, I'm wrong.
Not neccessarily wrong, but you are making unfounded speculation without empirical evidence...
Rob
Hi. Are you guys able to trade the new NIFTY50 future contract on NSE? TWS raises a trading permission issue, but I already have trading permissions for all available futures markets, so I can't figure out where the issue comes from.
Previously the NIFTY50 was traded in Singapore and was then transferred to NSE. At that transfer time (June 2023) was IB warning its customers that they did not yet have connectivity to NSE, and thus that IB's customers could not place trades. That warning was sufficient for me to decide to stop using this instrument. I am not sure whether that issue has meanwhile been solved by IB.
Yes, now they added the NSE contract and it has data, but it looks like it can't be traded. I was wondering if it was just me, since a few months ago Rob and Lore were talking about adding it to their instruments list:
https://www.elitetrader.com/et/threads/fully-automated-futures-trading.289589/page-380#post-5866029
Question for anyone feeling charitable:
I was thinking of taking the dynamic optimization concept a step further and creating two entirely separate universes->
1) a highly diversified set of indices for generating forecasts / optimal exposures
2) a basket of ETFs (considerably smaller in number) where trades will actually be executed
The trading strategies would be run against the indices on a nightly basis and then the optimization process would determine the ETF portfolio that minimizes tracking error (against index returns). One of the most critical differences from the book will be that hedged positions are possible and shifting correlations could deliver erratic results. Still, I don't wonder if there isn't something worthwhile in the approach over the long run. Theoretically, one could achieve additional diversification through proxy positions, albeit with greater tracking error. I also like the prospect of near-zero costs in the ETF space and the avoidance of dealing with futures data (too many symbol mapping headaches and data quality issues for a side project).
Anyhow, it's quite likely that this idea has been discussed elsewhere before, so I was hoping someone could point me in the right direction and save me from wasting time on what is likely an idiotic pursuit. Appreciate any comments/input.
I was thinking of taking the dynamic optimization concept a step further and creating two entirely separate universes->
1) a highly diversified set of indices for generating forecasts / optimal exposures
2) a basket of ETFs (considerably smaller in number) where trades will actually be executed
The trading strategies would be run against the indices on a nightly basis and then the optimization process would determine the ETF portfolio that minimizes tracking error (against index returns). One of the most critical differences from the book will be that hedged positions are possible and shifting correlations could deliver erratic results. Still, I don't wonder if there isn't something worthwhile in the approach over the long run. Theoretically, one could achieve additional diversification through proxy positions, albeit with greater tracking error. I also like the prospect of near-zero costs in the ETF space and the avoidance of dealing with futures data (too many symbol mapping headaches and data quality issues for a side project).
Anyhow, it's quite likely that this idea has been discussed elsewhere before, so I was hoping someone could point me in the right direction and save me from wasting time on what is likely an idiotic pursuit. Appreciate any comments/input.
ETFs can't get you anywhere close to the diversification of futures, even with "dynamic optimization."
You might also run into issues with margin, since futures provide more leverage, which you'll need with a diversified portfolio.
Shorting ETFs might be a problem. There may not be shares available to short. The borrowing cost might be high.
Using "indices" for your data may not work if the index doesn't include things like dividends, roll yield/costs, etc. Index data is not the same as tradeable instrument data.
In sum, unless you have no other choice (you can't trade futures and are limited to ETFs), I wouldn't do this. And even if you do it, you have to be extremely careful regarding the issues I mentioned.
But I'd also love to hear what others think.
Thanks for the reply. No doubt everything you say about the shortcomings of using ETFs is spot on. Also, point taken with the theoretical nature of index returns but I’m open to the possibility of a replicating portfolio being able to track them reasonably well despite not being “real”. Certainly possible (likely even) that the data will tell a different story. That aside, the critical question in my mind is what kind of diversification benefit can be realized through replicating uncorrelated assets (indices) with a weighted basket of ETF positions. For example, without doing the exercise, it's hard to know that -2 SPY, +3 TLT, and -4 XLE have historically been a near perfect replication of the Martian Widgets Index or some other highly idiosyncratic asset. I’m probably butchering the details but I vaguely remember listening to a podcast a year or so back where a trend following ETF was successfully replicating the SG trend index with something like 11 total liquid futures (it may have been Andrew DeBeer and DBMF but I’ll be shocked if I’m remembering either of those accurately). Anyhow, just thinking out loud here and apologize for the thread clutter. I can hear GAT’s stomach turning from across the pond.
This isn't completely stupid - depending on the reasons for trading ETFs.
1- Can't trade futures? Then ETF's might make sense. The universe will be different - not as good in commodities, but better in equity indices*.
2- VERY small capital- ETF minimum capital is lower (one share) so might be better
3- Can't go short? You could run a DO with a zero lower bound on positions
4 - Can't use leverage - this is a bit trickier since you will struggle to get a diversified portfolio if you include lower risk assets like bonds unless you have a very low risk target (I plan to discuss this in book #5)
* it's for this reason that we used to trade ETFs AND futures at AHL back in the day as there are a few places where there is no future for the equity index or bond index, or a less liquid future compared to a very liquid ETF
And using indices is OK as a 1st order approximation. You wouldn't get total return (unless you had total return indices) so you would be trend following spot, which misses out on carry (see AFTS book#4 for discussion); similarly it would be hard to generate a carry signal. But it's all better than nothing.
Then you have two bad reasons for trading ETF's:
5- "and the avoidance of dealing with futures data"
Well in fact to trade ETFs properly you would have about as much pain as you have to keep track of dividends unless you stuck to accumulated only, but if you are only going to use indicies then I suppose that's not a problem, although the logistics of shorting and borrowing are MUCH worse.
6 -"I also like the prospect of near-zero costs in the ETF space" ... not sure I follow here, ETFs have management costs, and except for a few cases the risk adjusted trading cost is usually higher than in the futures. You would also probably pay more to get leverage than in futures. I do a full comparison in book #3 LT. Lower costs is a poor reason to
"One of the most critical differences from the book will be that hedged positions are possible and shifting correlations could deliver erratic results. "
Then it isn't DO, it's something else (the greedy algo won't work if you allow unhedged positions). I don't see why you need to move away from the no hedging constraint just because you are trading ETFs. This is a completely seperate issue.
EDIT: I just saw your later post; OK if you want to replicate some index that can be replicated with a perfect regression on some ETFs, then do that regression! Don't do it implicitally by plunging into an optimisation, that's batshit crazy and your eignevalues will be bonkers.
Rob