Newbie asks: How to trade futures with only $100K?

Discussions about the testing and simulation of mechanical trading systems using historical data and other methods. Trading Blox Customers should post Trading Blox specific questions in the Customer Support forum.
stopsareforwimps
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Post by stopsareforwimps » Mon Jan 16, 2012 12:16 am

rhc wrote:When trading your system on ETF’s as a proxy to Futures
As previously mentioned you need to have a close look at your instrument. Here is an example where an ETF provides less than perfect fidelity to the index it allegedly tracks.

files/vas_versus_xjo_337.png

I remember once buying some shares in a Gold mining company called Sons of Gwalia. I thought I was getting exposure to the price of gold.

It turned out that any exposure to the gold price was completely hedged away. What I was exposed to was a huge derivatives book and a highly risky mining operation. When the mine collapsed and the hedge book moved in the wrong direction the company went bankrupt - because the price of gold went up!

http://en.wikipedia.org/wiki/Sons_of_Gwalia

Moto moto
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Post by Moto moto » Mon Jan 16, 2012 3:17 am

sons of Gwalia - brings back memories - you bought dodgy management and a short gold book.

I bought into that after it looked ok on the charts and management and brokers all said it was a screaming buy.....run it for a little while until a profit warning out of the blue.....I just exited....while some friends bought more. (it was a time of great debate over beers)
Once we heard the management were selling machines off at the pub at the annual diggers and dealers conference the world knew it was over.
I saw a study once that showed more mining companies were brought undone by their complex hedge books than by anything else......ahh memories - remeber FAI, onetel, MIMs, TNT, Annaconda

fab1usa1
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Post by fab1usa1 » Mon Jan 16, 2012 8:29 am

rhc, re: fidelity to underlying futures, how do you backtest such a discretionary system? I suppose it is possible to program Trading Blox to associate an ETF/ETN with the underlying futures, then modify the entry rule to execute when there is agreement. How would you handle an index like RJA, or would you avoid it altogether?

Call me naive but I treat my basket of 28 commodity and debt etfs like any other tradable instrument: I trade it on the basis of its own price curve. As long as the basket exhibits a positive expectancy, an upward-sloping equity curve, and it has the effect of raising the MAR and lowering MAX TE DD when it is combined with my stock system then I am happy. I am always open to new ways of thinking but I know from experience that I am a crappy discretionary trader.

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Post by michaelt » Mon Jan 16, 2012 12:27 pm

I found, for my systems, that using ETF's (the actual buying and selling) as the trading instrument for trading system signals created from futures markets data vastly underperformed compared to the futures results.

Perhaps this is time frame dependent.

I found there is enough difference in the ETF data compared to the futures data over time to mal-affect my system results. Other issues I found are there aren't ETF's for all the markets I trade (50). In some cases the ETF's existing are thinly traded.

fab1usa1
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Post by fab1usa1 » Mon Jan 16, 2012 7:26 pm

OK, let me see if I can explain clearly what I have done:

I created a new simulation suite named "ETF Signal" using the Donchian system on a portfolio of futures that include: C, CC, CL, CT, GC, HG, HO, KC, NG, QL, RB, SB, and SI. 0.8% risk per trade on $10MM starting equity. No broker positions.

I modified my suite for trading commodity ETFs to now use Donchian on a portfolio of ETFs that include: CORN, NIB, USO, BAL, GLD, JJC, UHN, JO, UNG, KOL, UGA, SGG, and SLV. 0.8% risk per trade on $100K starting equity. Using broker positions.

Each night at 9:30pm ET my AWS server downloads UA prices then runs Order Generation on the aforementioned suites. The results are emailed to me.

I will use the "current positions" in the "ETF Signal" suite to tell me when to enter and exit the associated ETF.

I will enter a position in the ETF in a quantity given by my "actual" suite (i.e. the suite that begins with $100K). I will set the initial stop price.

One of the concerns that I have with this plan is that I will not be entering/exiting positions with a standing-stop order at my broker. Perhaps I should look to see if IB offers a One-Triggers-Another (OTA) order. In that way I could trigger an order to buy/sell an ETF when the associated futures reaches a specfic stop price.

All critiques welcome.

rhc
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Post by rhc » Mon Jan 16, 2012 8:58 pm

fab1usa1 wrote: . . . Perhaps I should look to see if IB offers a One-Triggers-Another (OTA) order. In that way I could trigger an order to buy/sell an ETF when the associated futures reaches a specfic stop price.
All critiques welcome.
I believe IB does have such an order. It’s called a “Conditional Orderâ€

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Post by rhc » Mon Jan 16, 2012 9:07 pm

stopsareforwimps wrote: I remember once buying some shares in a Gold mining company called Sons of Gwalia. I thought I was getting exposure to the price of gold.
Moto moto wrote:sons of Gwalia - brings back memories - you bought dodgy management and a short gold book.
Ah yes, that great Aussie 'could-a-been', the Sons of Gwalia Gold Mining company.
I recall taking a bath in that one as well (must have been 10 years ago now).
The Gold price rallies hard and the ‘Sons’ plummet hard . . .WTF!!??
I subsequently learned all about the perils of gold hedging. Not a good strategy during a gold bull market

Ever the optimist & always looking for the positive spin, I booked that one down in my tax return as a 'Negative Profit' :wink:

fab1usa1
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Post by fab1usa1 » Tue Jan 17, 2012 8:57 am

re: Conditional Orders at IB, THANKS, rhc, that's brilliant! You talk about high maintainence. I really ought to learn the IB API in order to automate this.

One concern I have: my so-called "ETF Signal" suite is running with "Use Broker Positions" set to false. What if IB gets me into a position due to the underlying futures price surging, but then by the close of day the price settles back below the stop price. I remember in my formative years learning Trading Blox seeing this situation pop up in the trade logs. Is there anyway to tell TB to look at the high/low price to trigger entry instead of the closing price. I REALLLLLY don't want to solve this problem with Broker Positions. I am growing wearing of Broker Positions. Gotta jettison those suckers!

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Post by sluggo » Tue Jan 17, 2012 9:30 am

I hope you're able to invent a daily-operations procedure which you deem to be trustworthy, acceptable, comfortable, and robust in the face of unexpected and unprecedented price shocks. It will probably include
  • order placement
  • order fill checks (actual fills vs. computer expected fills)
  • calculating and logging slippage on all filled orders (for research purposes and/or to compare different brokers)
  • position matching check #1: actual contract month vs. computer expected month
  • position matching check #2: actual Long/Short direction vs. computer expected
  • ... position matching check #N: actual #contracts vs. computer expected
  • discrepancy repairs (aka "fixups"): when actual position not equal to computer position
  • total margin check: actual (broker's statement) vs. computer expected
  • equity comparison: actual (broker's statement) vs. computer expected
  • ad infinitum
If the procedure you invent happens to include Trading Blox "Broker Positions", embrace them. If it doesn't, you can safely ignore them. Either way, invent the absolute best possible methodology for you and then learn to love it.

"Best methodology for you" means that different traders have different resources and different goals. Some are able to watch the markets real time; others can spend 10 minutes before work on "daily ops" and 30 minutes after dinner. Some traders have fulltime programmers available, 40 hours a week; others have no programming resources whatsoever. Some want "down to the penny, perfect matching", others are happy when matching is "good enough for government work". Build your ops plan to satisfy you; other traders can mind their own business - they're not you.

I deliberately omitted "discretionary override" procedures from the list above -- but for some traders, human overrides (jumping the system) are an integral part of the overall trading plan. If you are one of these traders, you'll need to invent a way to monitor your overrides so they operate as you intend. You don't want to override on Tuesday and then have it nullified on Wednesday by an automatic "fixup," so devise a methodology to keep things consistent.

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