Weekly Trend Futures Program Description
Both weekly and daily Trend programs identify the long-term underlying direction of price movement. For stocks that movement is a reflection of economic health or weakness. For futures markets it may be the economy, inflation, or major shifts in supply and demand.
Economic trends develop slowly as investors try to understand the impact of policy decisions, then take positions that benefit from their conclusions. Within those trends are smaller adjustments, some based on short-term data and others simply noise, the effect of news releases, upgrades and downgrades, scandals, and rumors.
To avoid being fooled by short-term price moves, we apply a systematic trend, such as a moving average, over a period of, for example, 80 days. Then an adverse price action of 2 or 3 days will only be 2% to 4% of the total, not enough to change the long-term direction. Moving averages and other smoothing methods work best over these longer time periods.
Weekly data smoothes the results even more. By looking only at the close of trading on Friday, we can avoid adverse mid-week patterns and reversals. On the other hand, a weekly trend will enter and exit a trade a little later than one using daily data. In the trade-off between less noise (weekly) and faster response (daily), the weekly seems to consistently win. However, it requires an investor with an understanding that prices and account values will fluctuate whether we use daily or weekly data.
Trading Futures Markets
Futures markets offer many advantages over stocks:
- Far greater diversification
- Ability to leverage up and down
- Lower relative commission costs
- Less counterparty risk, that is, a futures market is not likely to be suspended and always has intrinsic value.
But they have the disadvantages:
- They require a larger investment
- Leverage, if not properly managed, can lead to larger equity swings
- They are not a hedge against a declining stock market
Because the performance of futures is uncorrelated to stocks, it has been misinterpreted as making money when the stock market is declining. Not so. Uncorrelated means the performance of the two are unrelated. They can both profit on the same day or both lose on the same day. However, there is only a 25% chance they will lose on the same day and the percentage loss may be very different. To perform in an opposite way is negatively correlated, a much more unusual situation.
Futures portfolios are different from stock portfolios and are not generated dynamically, that is, portfolios are created by assigning a specific allocation of funds to each market and each sector in order to assure proper diversification. The Orders reports will show lines with no positions. Rather than listing the futures alphabetically, they are shown by common sector: short-term interest rates, bonds, equity index (U.S.-Europe and Other), currencies, energy, metals, and agricultural products (“Ags”). Both long and short positions are shown and both are used in the portfolios. Position size (“Qty”) has two decimal places to allow scaling up.
In the “All Orders” report below, all profits and losses are converted to U.S. dollars using the spot price shown in the column “FX Price.” The delivery month is shown as “Dec” for the December contract. Note that the date of the last price is shown in column 3 (“Last Data”) because international markets may have holidays at different times. The “All Years I-Ratio” is the information ratio calculated over the entire life of the data. It will help you select those markets that have a better long-term history of performance.
Because futures allow for varying leverage, we can assign a target volatility, the desired level of risk, and maintain that by adding and reducing the position size. The process of controlling risk is done at every level within the program:
- Initial positions all have the same risk. This is done by dividing a nominal investment amount (e.g., $25000) by the price volatility of the futures market. This cannot be done with stocks because, if a stock has low volatility then the required size of the stock position would be larger than the investment.
- Futures are then grouped by sector and the sector performance is combined. The volatility of each sector is adjusted to the target volatility by scaling up or down all positions of all markets within that sector. It is important that the sectors be equal volatility before they are combined into the portfolio; otherwise, a sector with greater volatility must yield greater profits or the portfolio will show greater risk.
- Sectors are then allocated equal weight, subject to liquidity. Normally, agricultural products cannot have the same weight as financial product in a large portfolio because they are less liquid.
- After combining sectors according to their weight, the volatility drops below the target volatility due to diversification. We again raise that volatility by increasing the size of the positions. During the course of trading, if the volatility increases about our target, we reduce the size of all positions.
- Because the increase and decrease of position size will result in higher commission costs, we set a threshold so that changes in size only occur when the portfolio volatility changes by more than a minimum amount.
WF1 Weekly Trend Order Sheets for Futures, Fixed Portfolios of $250K, $500K and $1 Million
There are three different portfolios produced for the Weekly Trend futures program, $250K, $500K, and $1 million. All have the same format. Each have a target volatility of 14%, that is, there is a 16% chance of losing more than 14% in any one year. The 14% is approximately the average volatility of Managed Futures programs.
Signals appear by group, with rates first, then equity index, FX, energy, metals, and ags, if those groups are included. For the specific portfolios, see the detailed description under the tab for this program.
It is not always the case that the largest portfolios are the most profitable. Often, the smallest have the most risk and the most reward because they are less diversified. In Chart1 the $250K portfolio has a higher return than the $500K portfolio. The simulated performance of the three portfolios begins in 1989, more than 25 years. This strategy was developed in 2009 and has been unchanged since then. The portfolio selections are new to accommodate varying investment sizes. Refer to the Performance drop-down menu on the home page for current performance.
The $250K portfolio trades only U.S. and European futures markets, while the $500K and $1M portfolios trade global markets. They choose from 56 of the most liquid futures markets, but are limited to no more than 25 in the largest portfolio. There is a restriction on the maximum number of markets that can be used from any one sector: interest rates, equity index, FX, metals, and agriculture.
The partial “All Orders” report (actually named “Orders All”) shows the positions and trades for all futures markets, grouped by sector. Note that this report was run on January 20, 2013, a U.S. holiday. The date of the last price is shown in the 3rd column “Last Data.” All profits and losses are shown in U.S. dollars, and the column “FX Price” holds the conversion factor for non-U.S. markets. Because this report is run after the European markets open and after the Asian markets close, the “Exec Time” at the far right shows when the orders are to be executed. Position sizes reflect equal risk.
Sample Order Sheets for Suggested Portfolios
In the sample below for the $500,000 account, there are 15 combinations of positions and orders. As discussed earlier, all portfolios are risk-adjusted to the target volatility of 14%.
There will be one line in the Order sheet for:
- Positions held without any changes
- New entries, indicated with “New Buy” or “New Sell.” In some cases you will see “Reenter” if the position was exited the previous day.
- Positions to be exited, indicated with “New Buy” or “New Sell” followed by “Exit All,” “Reduce,” or “Increase.”
- Positions exited the previous day, indicated with “Bought” or “Sold” and “Exited All.” This line is necessary to show the last profit or loss for the trade.
When volatility changes significantly, all positions may be increased or decreased on the same day to maintain the target volatility.