The New Age of Commodity Trading

General discussions about futures.
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LeapFrog
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The New Age of Commodity Trading

Post by LeapFrog »

Not sure what to call this subject, but what does everyone think of the markets for commodity trading over the past 2 to 4 years? During this period there has been an unprecedented amount of new money poured into trading the little commodity markets (compared to the huge equity markets) and a gazillion hedge funds setup to trade every conceivable edge their staff of MIT PhDs can dream up on their banks of computers.

It seems the really successful funds, like the SACs of the world, make the bulk of their money in equities - I guess since they have a bulk ton of money and can't stuff too much of it into commodities. Those funds that mostly trade commodities, like John Henry & Co., have not done too well these past few years - lower than typical measurements of other financial instruments (but of course over the long term they do very well).

When running backtests over the last 20 to 30 years, it shows a marked decline (or DD) in the past couple of 5 years on all types of systems. Yes, human nature never changes. Yes, the markets will come back. Yes, there will be a watershed of all this excess cash and the markets will start "behaving" again (meaning "trending" for many of us). Amaranth maybe an example.

Just musing here and wondering what others think about the markets in recent times. I am doing fine - making money - caught the usual trends in sugar, silver and nat gas on the way down - or at least my fair share of it. But there have been plenty of hits taken along the way with all this chop in so many markets.

Every now and then you hear or see someone claiming they are making 100 or 200 percent returns - and well they might be. But over many years I would think us independent traders would be doing well to be making anything like what a venture capital fund makes - which is on average around 40% ROI. In this current environment that would seem pretty hard to achieve.

Any thoughts?
AFJ Garner
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Post by AFJ Garner »

Someone posted a recent Wall Street journal article about Steve Cohen on elitetrader.com - I regret I do not have the appropriate reference to hand.

In essence, apart from the usual speculation that SAC makes money on insider dealing, Cohen was saying that the days of high turnover rapid fire profits may be over for his fund - there is just too much competition in the markets. Too many short term opportunities are seized by the competition.

I too have puzzled long and hard over the enormous increase in volume in the futures markets over the past three years and more. And over the disastrous recent performance of some of the longer standing LTTF players, such as Dunn and JWH. But I have noted the continued success of the likes of David Druz, Dreiss and Mulvaney, the latter a relative newcomer.

Do markets change? Perhaps not but I believe that one's system must change over the years in order to catch profits out of trends.

I find the following simple set of tests instructive. Take any very simple LTTF system and run a series of identical tests seeking to capture differing lengths of trends over successive 5 year time periods beginning 1980 to 1984. Repeat the tests over several different portfolios. On a Bollinger band breakout for instance, use 50 days for the MA, then 100, 200, then 400. Notice how in many tests, in the earliest periods, the performance of the shorter term averages exceeds that of the longer term average on most measures. Notice how the situation is usually reversed in the later periods. Of course you can improve the performance of the shorter term systems in later days by adding a filter to ensure that trades are only taken in the direction of the longer term trend but then you have created a hybrid system and have probably masked the truth.

Be aware of course that many of the futures in existence today did not exist in the earlier test periods.

Use exactly the same settings for each test, including commissions and slippage.

Read the websites of the more successful performers over the past two or three years - they seem to be aiming for longer term trends.

It may be the case that increasing participation in the markets over the years has caused good volatility to become bad volatility. It may be that with less participation markets tend to rise or fall from A to B with less random wandering, less zig zag. It may be that it has become necessary over the years to use increasingly wide stops to capture such moves without being chopped out.

It is certainly the case that on-going research and testing is essential as the years go by and that adaptations will be necessary to survive.

Now no doubt the usual culprits will post the usual plethora of ultra smooth curve fitted portfolios and systems showing that I am 100% wrong. With profit rations of 1.001………..

Perhaps I am wrong but everyone must act on their own feelings, findings and preferences.
RedRock
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Post by RedRock »

Greetings Mr. Garner,

I concur with your observations about the 'drift' of an optimal parameter set to longer periods, with wider stops. I happened to be using the BB system to run a few tests recently. It is surely one of the 'cleanest' LTTF methods due to its limited number of variables.

An Interesting test, is to create a very broad portfolio and locate the best MAR range for say 20 years. Run a best parameter test with the 'golden' value. Then look at the Monte Carlo distribution on equity curve. The 'golden curve' Will be at among the highest of the many runs, in earlier years. And will fall off in a flattening curve as the years pass till today, the golden curve is in the middle or bottom of all the iterations. As you widen and lengthen the parameters, see how the opposite seems to occur. Poorer performance earlier, with top of the range performance of late.

rr
AFJ Garner
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Post by AFJ Garner »

I might just add that fiddling around with random entries and the new randomseed/random function greatly re-inforces my feelings on trend length.

And its also pleasant to put to the test good old Doc Van Parp's theory that given good exits and money management, even random entries can be turned to profit.

Try a simple system of price crossing a moving average of 50, 100, 200, 400 days and random entries. I have found it instructive.
twells5150
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Andy body still think this is true?

Post by twells5150 »

Does anybody still think the concerns expressed back in 2006 still apply?

From what I've seen in my recent backtesting of a short-term system, 2007 and 2008 were monster years in the futures markets, with all the turmoil and "black swans" that occurred.

I believe that the cycles just swung the opposite direction. At the height of the desperation in 2006, the market turned after everybody threw in the towel...

How have the longer term systems performed since 1/1/2007?
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