Trading on 2nd August

The market came with 4 points of stopping out the long position but then took off to the upside as soon as the New York market opened. Gain for the day was almost USD 3k. Today, I have added a second contract (@ 7391). Stop remains the same.

July 2018 Report

This month was the fourth month of the futures trading experiment. The first month was the model development phase, while May and June were about ironing out the glitches and training myself to trade the model properly (and not give in to gut instinct etc). In the first half of July I only traded one day and lost but model returns were good in the beginning of the month. Then in the second half of the month I got back into regular trading. Initially the model wasn't doing well but then things improved again as a short trade worked out.

The Australian Dollar fell from USD 0.7571 to USD 0.7432. The MSCI World Index rose 3.05% and the S&P 500 rose 3.72%. The ASX 200 rose 1.39%. All these are total returns including dividends. We gained 1.56% in Australian Dollar terms and 2.12% in US Dollar terms. So, we  outperformed the Australian market and underperformed international markets.

The best performing investment in dollar terms was Unisuper gaining AUD 4k closely followed by Cadence Capital (CDM.AX) gaining AUD 3.9k. The next best in dollar terms was Bluesky Alternatives (BAF.AX), gaining AUD 2.8k. The best performing asset class was "private equity", gaining 2.66%. The second best performer was US stocks, gaining 2.58%. The worst performing asset class was Australian large cap, gaining 0.41%.

The following is table of investment performance statistics computed over the last 36 months of data:

The first two rows gives the annual rate of return and Sharpe ratio for our investment performance in US dollars and Australian dollars. The other statistics are in comparison to the two indices. Based on beta, compared to the MSCI World Index we seem to be slightly geared, while compared to the Australian index we are less sensitive to market movements. We have a slightly positive alpha compared to the Australian and world markets. Finally, we now capture more of the up movements in the international and less in the Australian market and suffer less of the down movements in both the Australian and international markets.

This month I only made a small amount of money trading futures: USD 1.0k. The table compares my performance to the market and the model:

The US markets went up and then down. The model did outperform the market.* In the first week of July I didn't trade as I was in Japan and my phone wouldn't receive the text messages needed to log into the trading account. I actually received all these texts after returning to Australia! Then I traded long on a day when the futures price would suggest to be short and the index values suggest to be long and got stopped out. This made me do some more model research and revise the stops policy, though I found that index values provide better trading signals. After that I got back into regular trading trying to trade double the size but the model was losing at first. Then I started doing strategic and tactical trades, which helped psychologically.

We made more progress towards the new long-run asset allocation:

Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged funds.

The improvement in allocation, came partly due to market movements and partly due to investment activity. We invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Then there are distributions from funds and dividends. During the month, I also:

• I added another AUD 10k to the Winton Global Alpha fund, increasing the allocation to commodities.
• I added AUD 50k to the trading account and in the end was moderately successful at trading, increasing the allocation to commodities .
• I closed a small account with Colonial First State, which was invested in the CFS Geared Share Fund, reducing the allocation to large cap Australian stocks. 
• I rebalanced my CFS superannuation account, reducing the allocation to large cap Australian stocks and increasing the allocation to other asset classes.
  
• I bought 75,000 shares of BAF.AX increasing the allocation to private equity and real estate.
• I sold my position in PIXX.AX and bought a smaller amount of Platinum Capital (PMC.AX) and bought more as PMC fell further in price. This reduced the allocation to hedge funds.

* The statistics at the bottom of the table are based on only 4 months of data and so are not at all reliable yet.

Back to the Long Side

Closed short and opened long @ 7261.5. Stop is @ 7211.

The model switched to long today but the signal is close to remaining short and the intraday indicators are signalled short for the first part of the day. So, I kept the short position until now almost 7 hours into the trading day from 6pm New York time (8am Eastern Australian time). I put on a ten point trailing stop for two contracts, so it closed the short and opened a long simultaneously. Gained about 25 points on the short side compared to the market open.

Profit from the closed short was USD 3,000.90. The model gained 1.73% for the trade starting on 25 July and ending 1 August.

Monthly report coming soon.

Friday 27th July Trading

Finally we had some good downside on Friday with the NQ futures falling 126 points to 7299.75 – each point is $20 per contract. I had a strategic short from 7411.75 and a tactical short put on in the morning at 7429.5. My only regret is that I closed the tactical short at 7380 for only a $986 profit rather than setting a wider stop and letting it ride down for another $1600 in profit :) The strategic short is of course still in place as the model remains short. I am now up $885 for the month. Hopefully, I will stay up for the last couple of days of the month. I expect the market will go down further, both the model signals and looking at previous declines this year suggest that there is a lot further to go down before bottoming. All the previous declines went below the 34 day moving average and two went to the lower 34 day Bollinger Band:

If the latter happens, we would be at 6950 or so, $7,000 a contract from where we are now. Of course, given the strong trend it is more likely to be like the declines in April and June, which didn't reach the lower Bollinger Band.

Indications at the moment are that we don't want to do a tactical short during the US overnight on Sunday-Monday. A short near the US market open looks more likely to pay off.

Trading in 2018 is Objectively Better

I computed my average gain per NQ contract traded in 2006-2008 compared to in 2018. In 2006-08, on average I gained 0.46 points per contract traded or $9.31. Commissions on a roundtrip were $4.80 then. In 2018 so far, I made 3.69 points per contract or $73.74. Commissions are now $4.10 on a roundtrip. So, my trading now is almost an order of magnitude better. The average is brought down by lots of small daytrades I've done. As I plan to do fewer of those, the average should improve, I hope. On the other hand, the level of the index is now nearly 4 times higher than it was in 2006-8 and so a given percentage price move translates to more points.

This graph shows the equity curve on NQ trades - the actual number of trades is half this as there is one data point for each opening or closing of a position. Initially in 2006-7 I had a reasonably good increase in profits, peaking around $10k cumulative profit. Then there was a long slow decline into 2008 of a series of small wins, punctuated with larger losses. The big jump is the start of trading in 2018,  when I had a series of big wins. Since then, things have gone sideways, with losses equal to gains.

Tactical and Strategic Trading

After seeing a big profit disappear again a few times, I think I am going to adopt a combination of strategic and tactical trades now that I am trying to trade two contracts. One contract is always held in the direction of the model for as long as the model is long or short. This is the strategic trade. The other contract is in the same direction but can be closed out for the day when there is a big profit already. That is the tactical trade. Yes, day trading but the kind of daytrading where you put a trade on at the beginning of the overnight futures session and close it at the market open or vice versa. I had planned to do this but deferred it to stage 4 or 5 of the experiment. But I think I need the psychological boost now. I will make trading decisions using a chart with 2 to 3 hour candles. On a chart at that frequency most days break down into a rising and a falling period or a weak (when the market goes sideways) and strong period. I will close the tactical trade if it has made a profit and the next half of the day looks like being weak or going in the opposite direction to the model. Anyway, let's see if this works.

It probably was necessary to suffer through the pain of seeing a big profit on two contracts disappear a couple of times to be willing to have two contracts on overnight Australian time.... I tried adding one contract tactically before but was too nervous about it to set a wide enough stop.

Today the strong period was during the overnight (the market went down, in the model direction) and the weak period was during the US daytime when the market went up in the opposite direction to the model.

P.S.
I was just stopped out by the Google earnings report... Even more wishing I had closed one contract at the market open... This was a "tactical" rather than model stop. So, I got short again (tactically and strategically) at 7425.5 with the stop at 7441. This is very close, but was the second pivot resistance level when the model originally went short and so with the current model stop rules, that's where the stop stays.

Actually, the model is bit ambiguous today, but following the rules for these situations, we should still be short...

P.P.S.
I was just stopped out at the model stop. That means I'm out for today. Tomorrow morning I will re-evaluate the model direction. This is definitely looking like a losing month, similar to April, which was the initial model development month.

This model trade that was initiated on Friday lost 0.86%.

I researched the previous cases of similar ambiguous model signals so far this year.  There were only two previous cases, which were where the signal said to switch to short but was ignored because the turning point was from a value of the indicator that was close to zero. Both those times, staying long was the right thing to do. Maybe, in the absence of getting stopped out, staying short will turn out to be the right thing to do today. We will see. Either way, it is a very small sample to base any conclusions on.