VIX Future spread trading

VIX futures are usually in contango, meaning that the next month future is quoting at a higher price than the current month VIX future. But this spread in not constant, and at the end of the expiry cycle an interesting VIX future spread trading idea comes to my mind…

End of cycle VIX futures spread trading

Having a look at the chart below you hopefully see the spread trading idea by yourself:

VIX futures spread trading

VIX futures spread trading

The chart shows the rolling, non adjusted front month and 2nd month VIX future. (Reuters Eikon VXc1 / VXc2) The blue line underneath the chart is the absolute spread between those two data series. AS VIX is in contango, this spread usually is negative. That’s also the reason for the bad long term performance of UVXY and other volatility ETFs.

I marked all the monthly expiry dates on the chart. As you can see the spread between the front month and the 2nd month significantly increases shortly before expiry. “Shortly” usually means 5 to 10 trading days prior to expiry of the front month VIX future.

The spread widens as the front month loses most of its time value over the last trading days. This is specific for VIX futures and usually can not be observed in such clarity with other futures.

To make some money with this VIX specific behaviour, one would short the front month future about 1 week before expiry and hedge this position by buying the upcoming months VIX future. The total position has to be closed on expiry of the front month VIX future.

VIX spread trading strategy backtest

A quick and dirty back test of this trading idea reveals the possible potential of this strategy.

To do the backtest I used refinitiv data and constructed a backward adjusted front and back month time series of VIX futures.

The trading logic is quite simple: Short the front month from 13th to 19th, buy the back month at the same dates to hedge the position and trade the spread.

VIX future spread trading strategy backtest

VIX future spread trading strategy backtest

Attention: This is a quick and dirty backtest, as I did not use the exact expiry dates and did not include commission. Judging from the first chart, the exact expiry dates would give you an extra edge…

WARNING: Futures trading is not suited for everyone and there is no win without substantial risk! Kids, don’t try this at home!

Also have a look at another VIX trading idea, using the UVXY ETF. More on date based patterns in equity markets can be found in this article.

Charts thanks to tradesignal and Refinitiv data

If you want to run this backtest in your tradesignal software environment, the code has been published on we love algos.

The Probability of Normality

When selling implied volatility you want the market to stay within the  expected range. But what is the historic probability that markets behave as expected? And what other analysis could be done to enhance your chances and find the periods when it is wise to sell an at the money straddle? This article will try to give some answers to this question.

The normal distribution cone

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Daily Extremes – Significance of time

Analysing at which time daily market extremes are established shows the significance of the first and last hours of market action. See how different markets show different behaviour and see what can be learned from this analysis.

Probability of Extremes

A day of trading usually starts with a lot of fantasies for the future, then we try to survive the day and end it with a lot of hope for tomorrow. This psychological pattern can also be shown when analysing intraday market data. A high level of fantasies usually leads to a strong market movement, and thus market extremes can often be seen near the beginning or the end of the trading session. Continue reading

Factor investing in portfolio management

Factor investing has been around in portfolio management for some years. Based on algorithmic rules it became the big thing in trading and the ETF industry. But is there still some money to be made? Is small beta still smart or just beta? This article will give you a Tradesignal framework to test the factor investing ideas by your own. Continue reading

Backtesting Market Volatility

If you want to trade volatility, you can place a bet on the option market. Just buy an at the money put and call, and at expiry day you will either win or lose, depending on the actual market move since you bought the straddle and the price you paid for the straddle. To put it simple, if the market moves more than you paid for the two options you will win, otherwise you will lose. This article is about a back test of volatility. Continue reading

Demystifying the 200 day average

The 200 day average is considered as a key indicator in everyday technical analysis. It tells us if markets are bullish or bearish. But can this claim be proved statistically, or is it just an urban legend handed down from one generation of technical analysts to the next? Let’s find out and demystify the 200 day moving average. Continue reading

A graphical approach to indicator testing

A graphical approach to indicator testing

The first step in algorithmic strategy design usually is to find some indicators which give you an edge and tell you something about tomorrow’s market behaviour. You could use a lot of statistics to describe this edge, but I like to take a graphical approach in indicator testing first, and only later on worry about the maths and statistics.

Scatter Charts

A scatter chart is a simple to read chart style to see the correlation between two input values. A regression line on the scatter chart gives you a visual idea if the two securities are positively or negatively correlated, the “cloud structure” of the scatter points tell you if this correlation is tight or loose.

This sample scatter shows the correlation between the DAX and DOW levels, and it can be easily seen that these two markets are tightly correlated in a positively way.

The horizontal scale is used for the second security (DAX), the vertical scale is used for the first security (DOW). This chart type is predefined in Tradesignal, just drag&drop it onto the securities on the chart and select the right amount of data to get the analysis you want to see. (eg. 2000-now). If you see a tight and positive correlation like on the chart above, It might be used to select the instrument you want to trade. If market A is easier to predict than market B, select A.

Scatter on Indicators

Although a scatter chart is usually used to show the correlation between two markets, it can also be used to show the correlation between two indicators.

The chart above shows the correlation between digital stochastic and momentum. Have a look at the clustering of points in on the right side of the scatter, a high level in digital stochastic usually goes with a high momentum. This insight enables you to get rid of momentum, as digital stochastic is easier to read than the shaky momentum. Less indicators = less parameters = less curve fitting.

Scatter prognosis

Doing this analysis and getting rid of parameters is great if you want to minimise the dangers of curve fitting, but it does not tell you if your indicator is of any use at all, when it come to describing tomorrows move of the market. Surely it is valuable insight that a high level of stochastics corresponds to a high momentum, but does a high momentum today also mean that the market will move up tomorrow? And this question about tomorrow is the key question I ask myself when searching for some edge.

To get a glimpse on the prognosis quality of an indicator we will have to add some colour to our scatter chart. This colour tells me what the market has done after a specific indicator level has been reached. Green for an up move, red for a down move, black for not decided by now.

This chart shows the prognosis quality of the stochastic indicator. The left chart shows the 1 day prognosis of a 5 day stochastic, the right chart gives you the 5 day prognosis of a 21 day stochastic. Observe the clustering of the red and green dots. (black for not decided by now) As you can see on the left chart, the one day prognosis using a 5 day stochastic is not the thing to do. Regardless if stochastic is high or low, you get a nice mixture of red and green dots. This means the market, at a given stochastic level, sometimes moved up, sometimes moved down. Not this behaviour is not very useful for trading. Only in the extreme, near 0 and 100, this indicator seems to implicate a bearish next day movement.

The right chart, showing the longer term prognosis of a long term stochastic seems to be more useful. High levels of the indicator also show positive returns on the 5 days after, unfortunately you can not reverse the logic, as low indicator levels give a rater mixed prognosis. This visual analysis can give you an idea which areas of the indicator might be useful for further analysis.

A one dimensional analysis like on the chart above could also be done without this scatter chart. Going from one dimension to two dimensions is more useful, as it directly can be translated to do a kNN machine learning trading strategy. Have a look at the following chart. It shows the scatter of two indicators and the implication on the next days market move.

Lets start with he right chart. As you can see the red and green dots are evenly distributed, meaning there is no useful correlation between the used indicators and the movement of the market on the day after. If you would use a kNN algorithm with these two indicators, I would bet it would not return great results. Even if you would get a positive return, it might just be a lucky hit or curve fitting.

The opposite is true for the chart on the left. Here you can see some nice clustering of the red and green dots. Low indicator levels seem to predict a bearish move, high indicator levels result in a bullish move on the next day. A distribution like this is the perfect starting point for investing some time in a kNN machine learning  trading strategy. The kNN algorithm would give you a strong prognosis with high or low indicator levels, and most probably only a weak or no prognosis when the indicators are around 50. The returns will be stable, no curve fitting problems should be expected.

Conclusion

Using a scatter chart can give you a nice visual indication if your indicator might be useful for a prognosis of the next days market move. This is valuable insight, as you can see the whole data universe with one glimpse, even before you do a thoroughly statistical analysis. Numbers can deceive you, pictures usually tell the complete story.

Tradesignal Equilla code:

This article is highly correlated to the KNN machine learning article

 

 

Position sizing – the easy way to great performance

Working on your position sizing algorithm is an easy way to pimp an existing trading strategy. Today we have a look at an energy trading strategy and how the position sizing can influence the performance of the strategy.

The screenshot shows you the returns of the same trading strategy, trading the same markets, the same time frames and using the same parameters. The returns on the left side look nice, making money every year. The returns on the right side are somehow shaky, and you would have to love volatility of returns if you would think about trading this basket. The only difference between the basket on the right and on the left side is the position sizing.

The energy basket:

The basket trades German power, base and peak (yearly, quarterly, monthly), coal, gas, emissions. All instruments are traded on a daily and weekly time frame chart, using the same parameters. If the daily trading uses a 10-period parameter, the weekly trading would use a 10-week parameter. This limits the degrees of freedom I have when doing the strategy-time frame-parameter merge, thus minimizing the curve fitting trap.

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Sutton’s law: Go where the money is

There is an apocryphal story about the famous american bank robber and jail breaker William Sutton being asked why he was robbing banks. His genius answer was “That`s where the money is”.

There is a second famous quote of William Sutton, asked why he used a machine gun for robbing a bank: “You can’t rob a bank on charm and personality,” Both quotes come up to my mind when I am asked about the key things in trading.

Sutton’s law #1: Go where the money is

I am a trend follower, just because it is easier to do than picking tops or bottoms. Robbing a bank might not be a good idea, but going where the big money is, certainly is. Big money is invested over a long time, markets are just not liquid enough so that pension funds and other big players could switch their position every day, so once a trend, or call it bullish market environment, is established, chances are great that people come in, stay in and fuel the further movements. It becomes a self fulfilling prophecy. That`s where the money is, that`s where I can do my day-to-day small scale market robbery.

Sutton’s law #2: You can’t rob a bank on charm and personality

Sutton’s law #2 is my reason for being an algorithmic traders. The market basically is a fight of everybody against everybody, all weapons and tricks allowed (well, there have been some regulations introduced..) It would be suicide to risk your money on just your charm or personal beliefs. If there is big data available, use it. If you got an algorithmic trading software available, use it. If you lose, don`t blame the market, blame yourself for not being prepared.

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Monthly Seasonal Performance of Stocks

Seasonality changes over time!

First have a look at a screenshot of one of my favorite website investopedia.com They have some nice articles about the seasonal performance of stocks and the effects in trading. But unfortunately the information is not precise, and therefore misleading.

The chart shown suggests that the average return for the S&P500 (index or stocks?) has been positive, except for September. Further down they speak about the January effect, suggesting an average positive performance of stocks in January.

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EEX Phelix Base Yearly – Buy Wednesday, short Thursday?

When it comes to simple trading strategies, the day of the week is surely one of the best things to start with. That’s nothing new when it comes to equity markets. Everybody knows about the calendar effects, based on when the big funds get and invest their money. I do not know about any fundamental reason for the day-of-week effect in German power trading, but is seems to be a fruitful approach.

First of all I have to point out that it is not only the day of the week which is important. A strategy that just buys on Wednesdays and sells 1 or 2 days later would be doomed. But if you add a little filter which confirms the original idea, you will end up with a profitable trading strategy.

This filter will just be a confirmation of the expected move: If you suspect that Wednesday ignites a bullish movement, then wait until Thursday and only buy if the market exceeds Wednesdays high. Same for the short side, wait for a new low before you enter!

Have a look at the chart. The strategy shown buys on Thursdays if Wednesdays high is exceeded. The position is closed 2 days after the entry.

If you run a simple test which day of the week is the best to get ready for a long trade the day after then the next chart shows the return on account of the strategy using data from 2012 up to now: (exit one day after entry)

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Bitcoin – end of the bullish bubble

Bitcoin has come a long way but now it is time to say good bye.

Being a trend following trader on the long side, the chart right now suggest anything else but a trend following long strategy. It might all look completely different in a few weeks or months, but right now the bitcoin market is done. The ichimoku scanner indicator still shows 100% bullish, but have a look at the history and the formed indicator-market patterns:  As marked on the chart we can see a nice bearish divergence. This is not a long entry signal!

 

Lower highs, lower lows; goodbye bitcoin, loved to trade you, but with a bearish behavior like now you are not my friend any more.

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EUR/USD Zyklus Analyse: Ende des Abwärtstrends?

Der EUR/USD kannte seit September nur eine Richtung: nach unten. Doch dies könnte sich jetzt ändern.

John Ehlers Zyklus Analyse:

Der John Ehlers Corona Cycle Indikator, hier als Tradesignal Indikator verfügbar, deutet auf ein baldiges Ende des Abwärtstrends hin. ( Achtung Wochenchart!)

Dieser Indikator gibt einerseits die Länge des dominanten Marktzyklus an: Im aktuellen Fall beträgt dieser 20 Wochen.

Der Indikator darunter gibt die Position innerhalb des Zyklus an. In Trendphasen wird diese Zyklus Komponente des Marktes zwar durch den Trend überdeckt und ist nicht so klar zu sehen, fällt der trend jedoch weg und der Markt befindet sich in einer Seitwärtsphase, dann kommt die Stärke dieses Zyklus Indikators voll zum tragen.

Wie sieht es aktuell im EUR/USD aus?

Einerseits nähert sich der EUR/USD seinem bisherigen Tief bei 1.04$, was an sich schon als starker Widerstand gewertet werden kann.

Zudem nähert sich der Zyklus des EUR/USD seinem Tief. Für Anfang Dezember sagen die Ehlers Indikatoren das Zyklustief des EUR/USD voraus;

Und nun müsste sich der EUR/USD schon ganz gegen alle Chartgesetze verhalten damit sein Widerstand bei 1.04$ nicht zumindest kurzfristig hält. Aber als Spekulant setze ich lieber auf das wahrscheinliche Ereignis…

Handelsempfehlung an alle Shorties: Position absichern, bei 1.05$ Teilausstieg mit Gewinnmitnahme.

EUR/USD Ehlers Cycle Analysis

EUR/USD John Ehlers Corona Chart Cycle Analysis – weekly timeframe

DAX Marktbreite und 200 Tage Linie

Bald ist es wieder so weit und der DAX steigt über seine 200 Tage Linie. Das wäre an und für sich nichts Besonderes, steigt oder fällt der DAX doch jeden Tag über irgendeinen gleitenden Durchschnitt, doch ist die 200 Tage Linie etwas besonders an sich: Sie ist ein selbst erfüllender Indikator!

 Bankberater, Bild, Hausfrauen

Wenn jemand eigentlich nichts über technische Analyse weiß, die 200 Tage Linie kennt er. Jeder Bankberater versucht damit seine Aktien zu verkaufen; Wenn der Markt über der 200 Tage Linie liegt soll das  ein bullishes Signal sein.

DAX Above 200 Day Average

 

Und in der Tat, da jeder diesen Indikator kennt, ist es tatsächlich ein bullishes Signal wenn der Markt über seiner 200 Tage Linie liegt, schlussendlich trauen sich dann alle die fast nix von technischer Analyse wissen in den Markt.

DAX Marktbreite

Um zu sehen ob so ein Schnitt des DAX über die 200 Tage Linie auch signifikant oder nur ein Strohfeuer ist, kann man die Marktbreite des Index untersuchen.

Marktbreite=Wie viel % der Aktien eines Index liegen über der 200 Tage Linie

Diesen Indikator sehen Sie unter dem DAX Chart abgebildet.

DAX Above 200 Day Average history

Allgemein gilt für die Interpretation, dass wenn der DAX über der 200 Tage Linie liegt und mehr als 50% der Aktien des DAX ebenfalls über der 200 Tage Linie liegen, man trendfolgend vorgehen kann. Wenn dann einmal 100% der Aktien über der 200 Tage Linie liegen ist die Blase meist zu Ende und man sollte die Position mit einem engen Stop absichern.

zum Tradesignal Equilla Code Passwort “code”

Reality vs. Robert W. Colby, CMT

Dont`t believe!

Papier ist geduldig, darum ist es oft besser wenn man selbst testet bevor man ein veröffentlichtes Handelssystem mit seinem Geld ausprobiert. Heute geht es hier um einen Handelssystem out of sample Test

Ein schönes Beispiel dafür ist eine Strategie aus Robert Colbys Buch “The Encyclopedia of Technical Market Indicators“, 2nd edition, 2003, page 791ff.

Darin wird ein einfaches moving average crossover Systeme vorgestellt, welches anscheinend seit beinahe 100 Jahren phänomenale Gewinne verspricht.

Hier eine Kopie aus dem Buch:

colby wma strategy

colby2

Tradesignal Backtest

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Euro: Point&Figure bullish 1:20?

Auf Sicht von einigen Monaten ist der EuroDollar wieder am Weg nach oben.
Der weekly Point&Figure Chart hat die bearishen Kursziele unter 1.00 nicht erreicht, und wenn auch noch immer klar unter der fallenden Trendlinie, so sind seit einigen Monaten steigende Kurse zu beobachten und es werden erste bullishe Kursziele berechnet. Interessant sind die nächsten Ziele um 1.20.

Euro weekly Point&Figure Kursziele

Euro weekly Point&Figure Kursziele

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