Following The Trend: Futures Data and Tools

Following The Trend“With futures strategies you can cover everything from equities to bonds, metals, grains and even meats, with standardized instruments following the same basic characteristics. If you are looking to build portfolio strategies that make full use of diversification effects, this is a dream.” – Clenow

To start off the second chapter of Following The Trend, Clenow once again points out the diversification benefits of futures strategies. This represents a level of diversification that traders can’t easily find anywhere else. A trader can trade everything from stocks and bonds to gold and pork bellies to bonds and currency. I particularly like Clenows argument that a diversified equities portfolio will still be highly correlated during extreme circumstances.

Clenow also points out that trading a futures strategy provides the benefit of leverage. When trading futures, you only have to have enough money to cover the margin, which is usually a fraction of the total value. This allows a trader to have more control over his risk levels. While margin requirements vary based on the market, they are generally in the 10% range.

“When dealing with quantitative strategies, the most crucial building block is always the data itself. Everything else you do will be based on the data and if you have even a small problem with your data, your calculations and algorithms may all be for nothing and your actual trading results may differ substantially from what your simulations had you predict.” – Clenow

Clenow spends a good portion of this chapter discussing how traders can construct long term price data for futures despite the fact that each futures contract has a limited life span. He explains that the most liquid contract is really the only one that matters. The most liquid contract is generally the one about to expire, however the liquidity switches to the following month’s contract slightly before the actual expiration.

The conversation then moves into term structure, where Clenow explains that the price of future contracts generally increases with time due to the theoretical cost of holding a given commodity over that time period. This concept also applies to financial futures due to interest. The basic concept is that if you are buying a future commodity to hedge price, then the person you are buying it from theoretically has to hold the item for the time frame established before delivering the commodity to you. There is a cost associated with this storage.

“What is required to do proper back-testing simulations is a continuous time series that reflects the actual market behaviour, which does not necessarily mean that it reflects the actual prices at the time.” – Clenow

Clenow continues by pointing out that if you were to chart the actual prices of futures over a long term period, even if you were to use the most liquid contract at each point, there would still appear to be gaps with no data between contracts. He discusses different ways to adjust the charts for these gaps. No matter which way you adjust, it is important to keep in mind that with these adjustments, the specific price at any past point will become inaccurate, however the long term trends will be accurate.

“It is therefore imperative that you don’t skip any asset classes and make sure that your strategy covers a wide range of markets across all available markets, or you simply miss the plot of diversified futures trading and most likely blow up sooner or later.” – Clenow

Clenow divides all futures markets into four categories: Agricultural Commodities, Non-Agricultural Commodities, Equities, and Rates. He admits that this is a very crude way to classify these markets, but I understand his reasoning that we need a practical way to look at these groups.

I thought it was interesting that he points out that there is very little correlation between markets in the Agricultural Commodities category. He also points out that many managed futures strategies will struggle a great deal with equities, however when the equities markets have very bad years, managed futures will be cashing in on the short side.

“Before you can start trading you need to model and test your strategies. For that you will require lots of data, applications for testing strategies and possibly your own database solution. If you are new to programming, I strongly advise that you pick a relevant computer language and start studying.” – Clenow

This is where I need some help!

I’m sold. I am completely on board. I want to learn how to build, program, backtest, and trade these systems. What should I do next?

Clenow strongly recommends Wealth Lab, but when I looked into it, I found that I would have to have an account with Fidelity with a minimum of $25,000 and 120 trades per year in order to qualify to use Wealth Lab.

Clenow’s other recommendation, RightEdge, seems to have a $50/month license, which would be interesting if it wasn’t his second option.

I also had someone recommend Tradingblox which has three levels, but the level where you can build your own system is $4,000.

I know other people who use MetaTrader 4 and Ninja Trader, but don’t know much more about them except that they won’t run on my MacBook.

I also know TradeStation exists, but haven’t seen anyone recommend it.

So here is my question:

I have a strong desire to learn how to program trading systems.

I am willing to study any programming language needed.

I have very little trading capital, which makes any large minimum deposits impossible.

I am willing to spend a couple thousand dollars up front, and then up to a couple hundred per month for licensing or data.

What system/software should I focus on?

Please send any and all feedback to me on twitter @DontTalkStocks or email me: andy@donttalkaboutyourstocks.com