In search of Volatility, Volume, and Tradable Markets
April 25, 2005
How many of you out there are trading the Schatz or Bobl markets?
Ok - now how many of you are trading Lumber, Rough Rice, or Pork Bellies?
I'm guessing there are many more of you who have heard of Lumber and Pork Bellies then Bobls and Schatzs, and the number of long term trend following portfolios we see still containing Lumber and/or Pork Bellies fuels that argument.
Would it surprise you to learn, then, that the two funny sounding markets have 25,000% more front month volume and open interest. That's right. At front month volume plus open interest of about 1 million contracts a day, the Schatz has approximately two hundred and fifty times the volume and open interest than in the Lumber market, which has a paltry 4,000 contracts a day in volume + open interest.
For those who don't know, the Schatz is the German equivalent of the US Two Year Note, and the Bobl is the German equivalent of the US Five Year Note. Both are trade on the all electronic Eurex exchange based in Europe. .
Check Your Portfolio:
Part of being successful in not just trading system investments, but commodity investing in general, is knowing which markets to consider for your portfolio. Many trading system investors utilizing long term, trend following system are unfortunately at the mercy of the system developer - who generally puts his or her portfolio together with an eye towards performance, not volume, volatility, or their by product liquidity.
Liquidity is of the utmost importance, however, as it directly influences performance. Poor liquidity will result in poor fills - and poor fills, as we all know, will result in poor performance. The goal in commodities investing is therefore to get the best fills, and one huge way to achieve that is to insure you're trading in those markets with the best liquidity.
Liquidity is greatest in those markets where there is good volume and reasonable levels of volatility, and poorest in those markets with low volume and relatively high amounts of volatility.
It's no coincidence then, that the best fills come in those markets at the top of the green table below ranking markets by average daily front month volume + open interest, and that the worst fills come in those markets at the top of the yellow table below ranking markets by their year over year change in volatility.
Many of the markets at the top of the yellow table have adequate volume to support trading, but the markets move so quickly and violently that hitting exact price points becomes anything but an exact science. Natural Gas, for instance, averaged over 400,000 front month contracts in volume and open interest, but slippage there can be upwards of 100 times the tick value. Compare that to Euro Dollar slippage of just 1 times the tick value and S&P slippage of at worst, 10 times the tick value.
The 7 markets at the bottom of the green volume + open interest table below are markets Attain recommends staying away from altogether. We classify those markets as "barely tradable", as each has front month volume + open interest of no more than 7,500 contracts per day on average.
If you have trouble seeing how small a volume number like 4,000 is, imagine an order in Rough Rice in the Aberration system. If there are 200 people around the world who trade Aberration (I would guess that number is more like 2,000 when considering knock offs and similar strategies), and each did 2 Rough Rice contracts on the Aberration signal. That would be 400 contracts, or 10% of the average daily volume, all doing the same thing at the same time, and that is not where you want to be.
Its also very interesting to note that just 9 out of the 69 markets listed below saw their average volatility increase over the past year. Trend following systems generally have a long volatility profile, as their strategy of getting out of losers quickly and letting winners run is similar in performance to buying out of the money options in hopes of a large move in one direction or the other. And the fact that just 13% of markets saw increases in volatility speaks volumes about the poor trend following environment over the past twelve months.
So before diving headlong into a portfolio of markets you assume are tradable, do a little research and see how tradable your portfolio of markets really is. If you're looking at markets that trade less than 7,500 contracts a day, you should look again. Additionally, if you think you can day trade Natural Gas or Coffee - be prepared for slippage numbers 50 to 100 times the tick value. If you're system can handle that big of a handicap, then you might just have something.
IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can
carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading
losses are material points which can adversely affect investor returns.
Feature | Week In Review | Chart of the Week |
Feature | Week In Review | Chart of the Week |
Welcome back volatility! After what seemed like an interminable absence, volatility swept back into US equity markets again last week, even though stock indices finished around even for the week. The highlight of the week came on Thursday, when stocks shot up after hitting new lows for the week. When all was said and done, the Dow finished better by over 200 on the day, and a few day trading systems came out of it smiling.
**Day Trading**
Another week packed with earnings reporting kept volatility on the rise and the majority of the day traders welcomed the large daily ranges.
Early Bird III SP came out of hibernation and made $3,350 on the big up day on Thursday. It was the first trade the system has taken since the fall of 2004, as the system requires an early move of over 1%, either up or down, to initiate a trade. AG Xtreme, meanwhile, continues to thrive in the current higher volatility market conditions - tacking on another $4600 in profits last week.
Compass SP also continued to perform at its best, trading every day of last week for a grand total of $3635.50, adding to the spectacular April it is having so far. Clipper had similar results, trading every day for profits of $1131.60 per contract, in running its streak to eight consecutive winning trades (five last week). BWT Zones SP chipped away at the market and its current DD, taking small profits on a daily basis for a gain of $1397.50 for the week.
Systems that trade off the e-mini SP were highly successful on the week as well. Helix ES was at the top of the pack, profiting $1400 per emini contract while trading less frequently than usual. RC Miracles and RC Success were hard at work, making $982.50 and $680 per contract respectively.
Elsewhere, R-Mesa had mixed results for the week, making a mere $180.25 on the week after a tough outing on Tuesday. DayBreaker struggled through the week, giving back $1830 on two trades,while Impetus eRL was profitable on two out of four trades from last week, but lost $83.90 per contract for the week.
The BWT Russell systems had a tough time last week with several reversal trades that turned unprofitable in the blink of an eye. BWT Rock N Russell lost $1329.50 per money management unit using the position manager and . BWT Zones Russell also gave back $1201.80 per contract. Cipher ES finished the week near breakeven, making just $22.50 and Magnitude ES lost $375.
**Swing Trading**
Despite the large daily ranges the net affect on swing systems was relatively minimal as stocks closed up just over 1% for the week.
At times when the market trends are developing swing systems are typically in and along for the ride or out of the market entirely. A prime example of a system holding on for the ride has been Eclipse eRL. The system entered short the eRL on April 13th and eventually exited the trade last Tuesday for a profit of +$1,500 after hitting its trailing stop. At one point during Monday’s session the system had open trade profits of $2,860, which at the time looked like it was going to be a lot more based on the intraday momentum.
Another set of systems which have been “along for the ride†have been Axiom eMD and NQ, both systems continued to maintain their open positions throughout the week. Axiom eMD was ahead by +$1,725 and Axiom NQ was gaining +1,080 for the week. The only other index trading for the week came from Tzar NQ which reversed short and lost -$80.00. The system is now short the NQ and eMD while holding long the ES and eRL.
US bonds and notes also closed slightly higher on the week, benefiting both Mesa Bonds and Notes. The systems are earning +$4,168.75 and +$1,687.50 respectively in open trade equity on current long positions.
As a reminder many systems rely on the extended follow though of the market to pad annual profits thus their willingness to give back open trade profits in attempt to cash in on the largest market movements. Axiom for example has a windfall profit target and will trail the market with strategic stops, but is also careful not to force the system into being stopped out on a quick market spike in the opposite direction of the trend.
**Long Term**
The general trend of the week was bearish in equity markets and bullish in bond markets both foreign and domestic. Both Andromeda and Aberration Plus took new short positions in the Nikkei, which closed the week nearly unchanged after a huge sell-off the week prior.
Both systems also entered long in the Eurex Euro Bund, the German equivalent of the Ten-Year Note in the U.S. As of the close on Friday, Andromeda and Aberration Plus were making $20 and $200 per contract on the long trades respectively in the Bund positions. Aberration Plus was also stopped out of short positions in the Ten, Five and Two-Year Note for losses of $2037.50, $768.75 and $471.88 respectively. To counter those losses, the system took profits of $950 per contract in the Euro Dollars-which have crept higher in past few weeks after a lengthy downward trend.
The Dollar lost some ground against the major foreign currencies last week, the Japanese Yen in particular. Axiom LT exited its short position in the Yen for a gain of $2887 on the closed out trade that it initiated in March. Andromeda’s break-even stop kicked in yielding a small loss of $62.50 after commissions on its short Yen position. Aberration Plus continues to hold short in the Yen and is losing $875 per contract in open trade equity as of the end of the week.
Elsewhere, Grain markets pushed higher on the week as a whole. Soybeans were up 2.88% on the week in favor of Andromeda which holds a long position for open trade profits of $3225 on two legs of the trade. Andromeda also is holding long in Soybean Oil, which finished the week nearly unchanged, for open trade profits of $70 on this leg of the trade. Axiom LT is also long Bean Oil, making $70 on this leg of the trade as well.
The dollar amounts shown above represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per R/T commission ($30 per emini). Except where noted, the gains/losses are for closed out trades. Percentage gains/losses are hypothetical and based on developer recommended initial balances as listed at www.attainaccess.com. Please carefully read the important risk disclaimers below.
IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can
carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading
losses are material points which can adversely affect investor returns.