Fully automated futures trading

Discussion in 'Journals' started by globalarbtrader, Feb 11, 2015.

  1. truetype


    Trendfollowing has a ½- ¾ forward-looking Sharpe, optimistically. That Sharpe will have normal drawdowns too large to serve as a reliable income stream.
    #711     Apr 12, 2017
  2. Yes; I assume it's about 0.5 when calculating my risk target. Of course the better your sharpe the more likely your trading returns will be reliable.

    But the role of skew is also important here.

    Positive skew is good; but makes it harder to live off the 'income'. Suppose you're Taleb and you can buy disaster insurance cheaply enough that your Sharpe is 0.5. But for 9 out of 10 years you don't get to eat. Only in 1998, 2008, ..., would you make any money. Taleb would need to have other investments to live off 9 years out of 10.

    If you're Bob, running a short gamma/market making strategy then you might reliably make 1% a month every month which you can use as 'income'. But if even your sharpe is 2.0 then every 5 years you'll lose 50%. This trader needs a disaster fund to cover the bad year.

    The first guy (Taleb) can't live off their trading income, but is under no illusion that they can.

    A trend follower isn't as extreme as this, but it's conservative to assume you won't make money for 3 years out of every 5.

    The second guy (Bob) is actually in a more dangerous position. They will think they can make a living purely from trading profits, and especially given a too short (or no) backtest they will underprovision their disaster fund, reserving perhaps 20% of risk capital for potential losses. In five years time they will have gone bust.

    #712     Apr 12, 2017
    truetype likes this.
  3. isotope1


    I'm increasing my allocation to futures, seeing as the first couple of months of testing shows that everything is working nicely. I have a few more Q's:
    1. I'd like to construct a portfolio of hedges that produces a steady 3-5% return (something like just the dividends from the S&P). Is this possible?
    2. How do I see/calculate how much forex I need to prevent interest charges? (only £20 last month but why waste)
    3. How much statistically significant increase in Sharpe did you get from reweighting the portfolio due to correlations, vs equal weights?
    Pretty safe to say I owe you more than a beer at this stage. Looking forward to book 2!
    #713     Apr 19, 2017
  4. Are you using Interactive Brokers? If so, they can make a special report available which shows the detailed interest calculation on a daily basis. This report is not available by default, you have to contact their customer service before they make this report format available.
    #714     Apr 19, 2017
  5. 1. Nope. I mean, I could easily construct a portfolio that will return you 3-5% dividend yield, but you'll be taking on market risk. Or you could sell OTM options with very little leverage, and again earn 3-5%, but with the risk that once every 10 years you'd lose 30%.

    2. @HobbyTrading has given you one answer for IB. I don't personally look at this report, since I'm never 'near the knuckle' on cash (I paid just 0.15% in interest costs last year). Instead I just use the standard activity report.

    If you look at your activity report for cash there are 3 columns - total = securities + futures. Total is how much money you have; futures is how much you are using for margin, securities is eitiher excess (if +ve) or borrowed (if -ve). Look at the 'settled cash' row. If your security in one currency is +ve, and another is -ve, then you are wasting money because you'll be paying the interest rate spread in lending in one currency and borrowing in another.


    Total Securities Futures IB-UKL Month to Date Year to Date
    Starting Cash    16,735.60    -2,505.01    19,240.61    0.00       
       Commissions    -4.00    0.00    -4.00    0.00    -8.00    -40.00
       Broker Interest Paid and Received    0.00    0.00    0.00    0.00    -12.83    -62.44
       Cash Settling MTM    -2,020.00    0.00    -2,020.00    0.00    -2,010.00    6,010.00
       Net Trades (Sales)    0.00    0.00    0.00    0.00    0.00    12,456.40
    Ending Cash    14,711.60    -2,505.01    17,216.61    0.00       
    Ending Settled Cash    16,731.60    -2,505.01    19,236.61    0.00       
    Total Securities Futures IB-UKL Month to Date Year to Date
    Starting Cash    76,953.68    3,017.64    73,936.04    0.00       
       Commissions    -2.00    0.00    -2.00    0.00    -41.20    -570.40
       Dividends    0.00    0.00    0.00    0.00    779.82    940.47
       Broker Interest Paid and Received    0.00    0.00    0.00    0.00    -57.39    -189.59
       Cash Settling MTM    -2,170.00    0.00    -2,170.00    0.00    -1,655.00    -9,160.00
       Net Trades (Sales)    0.00    0.00    0.00    0.00    0.00    75,000.00
    Ending Cash    74,781.68    3,017.64    71,764.04    0.00       
    Ending Settled Cash    76,951.68    3,017.64    73,934.04    0.00          
    Hopefully it's clear despite the awful formatting that I am borrowing margin in CHF, and lending in EUR; strictly speaking I ought to do a trade here to reduce this cost (I could buy all the CHF I need and still have EUR left over). The key figures are the 'securities / settle cash' figures (-2,505.01 and 3,017.64 respectively)

    To see how much is costing you is a bit harder since interest is charged sporadically at least on my account; you can look up the interest rates on IB website, or use the report that @HobbyTrading has mentioned, or if your cash balances are fairly stable then run an activity report that goes over several days and look at the interest and interest accruals sections. You can then work out if it's worth trading or not.

    Looking at the website the rate for lending EUR is 0% and borrowing CHF is 1.5%; so I'm paying about 1.5% on 2,500 CHF. It will cost me $2 / 2 CHF commission to do this trade (or @0.08%, plus perhaps a spread of 0.01% at worse, so call it 0.09%). So if I expect to hold this cash balance for longer than around 3 weeks I should probably reduce the CHF balance down. In practice I'm lazy and probably won't bother unless the required trade reaches at least 5K.

    If you're tight on cash it might be worth calculating your own expected costs / breakevens to trade, eithier in a spreadsheet or as part of your code.

    Last edited: Apr 19, 2017
    #715     Apr 19, 2017
  6. 3. Not much because my portfolio is quite well balanced across asset classes except vol (2 markets) and STIR (1 market)
    #716     Apr 19, 2017
  7. isotope1


    1. In this case, would you consider holding government bonds instead of cash? It should be a lot quicker/easier to get these back vs cash in the case of IB failing.
    2. This makes a lot of sense. That's very helpful. The bulk of my positions are USD, with a borrow rate of 2.4%, it makes sense to re-balance the currency.
    3. That's good to know. I removed the most correlated instruments from my system, but I'm struggling to figure out what to do with the USD currency pairs (gbp, mxp, eur, yen). Just eyeballing the price chart shows they move together.
    GBP/MXP/EUR panama stitch (no-rebase/normalization):
    #717     Apr 20, 2017
  8. 1. Not really for a few reasons. You'd need to hold government bonds in every currency you're trading. You'd end up paying a margin interest spread to IB, since bonds can't be used for margin you'd have to borrow against them. You'd eithier have to hold long term bonds (interest rate risk) or short term bonds (cost and complexity of regular rolling). But if the fear of IB blowing up scares you more than any of these factors, by all means go for it.

    3. The correlation of the prices is irrelevant. It's the correlation of the trading subsystems for each instrument that matters. What are those numbers like?

    #718     Apr 20, 2017
  9. RaAt2


    Nice nickname.
    #719     Apr 20, 2017
  10. isotope1


    Good point. It looks like the only one that might be of interest is USDEUR & USDGBP.

    Subsystem returns correlation (EWMAC & Carry), weekly resample:
    (Sorry for terrible colours, I'm using a dark theme on Jupyter)
    #720     Apr 20, 2017