Update on Trading Research

I came to the conclusion that none of the trading tools I developed are reliable. They can match market behavior for a while and make money, but then the relationship breaks down. In the long run there is no relationship between any of these indicators and returns.

I wrote a back-testing program for Turtle type trend-following models. This allows me to optimize the time periods to use to maximize profits. There is the potential for over-fitting and unstable relationships here too. The answer I think is to regularly re-optimize as the market changes. This re-optimization is easy to do. Given that a wide range of values is profitable in the exercise I did, I don't think there would be a sudden failure. We will see.

In the backtest there were 78 trades with a 48% win rate. But wins were on average 3.45 times larger than losses. The annualized Sharpe ratio is 2.2. Here there is a negative correlation between the initial risk taken (amount of money lost if the stop is triggered) and profits. That means it makes sense to bet bigger when the risk is lower:

I am now trading Bitcoin futures with the optimized algorithm (Long Bitcoin since yesterday). Next step is to see if there are other futures I could trade. Stock index futures aren't more profitable than just going long the index.

Save 4% on Transferring Money to Australia

My brother is planning sending me my share of the proceeds of selling my mother's apartment. If we sent the money in Falafeland currency to our account at Commonwealth Bank in Australia we would lose around 5% of the value relative to the exchange rate on the forex market (representative rate). The spread between their buying and selling rates is around 10%. This is just crazy. I can think of another word that starts with "cr". I checked the rates of other Australian banks. HSBC and Macquarie are better, but not that much better.

My brother got a quote from his bank in Falafeland to convert the money to Australian Dollars and then send to Australia. The cost is about 1% relative to the representative rate. Online, I found that TorFX is recommended for such transfers. I now have a quote from them which is about 1.2%. So, we will go with the Falafeland National Bank.

You can get much, much better rates by trading in the forex market yourself using a broker like Interactive Brokers. But I can only hold currency in AUD, USD, GBP, and EUR at IB. So, I can't make a conversion from Falafeland money to AUD.

Doing More Trading Research

Seems like April is the time for me to think about trading. I developed a very simple mechanistic trend-following model for trading Bitcoin futures. I have placed orders in the market but they haven't triggered yet. Initially, I tried to be too clever, but quickly decided that just using mechanical rules will work better...

Now I am returning to thinking about more sophisticated models as well. Here are the results from a very simple mean reversion model – it goes short when stocks are strong and vice versa, with daily trades on the NASDAQ index:

This assumes perfect trades with no fees. It worked great until the end of 2008. Then it did nothing for three years and then started working again. But in the last five years it again went nowhere. Strangely, it looks a lot like the returns from trend-following over this period. Still, from 2005 to the present it returned 19% per year. I might be wrong, but I'm thinking that this is a benchmark for more sophisticated forecasts. If we can predict that we should trend follow rather than mean revert for a few of the worst days here, returns would improve a lot. But it has to be a very simple method that won't result in overfitting.

On the other hand, the NASDAQ 100 index itself returned 14.18% and go long with a stop if the market falls 1% or more intraday returned 19.85% a year.