Advanced Futures Trading Strategies
30 fully tested strategies for multiple trading styles & time frames
By Robert Carver.
About the book
This book contains the details of 30 strategies, specifically designed for trading futures. I explain how and why each strategy works. The rules for each strategy are described in detail, and I analyse the performance of the strategy over historical data, so that you can better understand its strengths and weaknesses, and likely behaviour in the future.
Diversification is the most powerful weapon in the armoury of the financial trader. After reading this book you will have access to a large and diversified set of trading strategies. But, as I will explain in some detail, diversifying across different futures markets is an even more potent route to extra profits. Fortunately, there are hundreds of futures traded all around the world, covering every possible kind of tradeable
instrument: US interest rate futures, the cryptocurrency Bitcoin, Japanese iron ore, Russian stocks, and milk – to name just a few.
But opinion amongst traders is divided: should each market be traded differently, or should we use common strategies that work equally well irrespective of the underlying asset? There are certainly benefits to using common strategies. If we can test strategies across a range of markets then that gives us more confidence thatthey will work in the future.
I use data from over 100 different instruments to test the strategies in this book, some of which have over 50 years of data. So you can be confident they are not one-trick ponies that work on one or two markets, or only in benign market environments. But it’s also important to make sure that a given strategy is suitable for a specific instrument, and if necessary to adapt it: I will explain how. I will discuss how you can select the best set of markets to trade, given the capital you have available to trade with, and how to allocate risk across your portfolio.
This book will also cover diversification across different trading strategies and time scales. I also explain how you can evaluate the performance of a strategy, how to ensure you are using the correct degree of leverage, how you can predict and manage your risk, and how you can measure and reduce your trading costs.
Of course futures trading isn’t just about the exciting job of predicting the direction of the market. It’s also about relatively dull stuff: deciding which contract to trade, executing your trades, managing your risk, and making the most efficient use of your cash. I discuss these potentially boring, but very important, subjects in the final part of the book.
Who should read this book
You need significant capital to trade futures. Although some instruments can be accessed with a few thousand dollars, most require much more. As a rule of thumb, you will find this book most useful if you have at least $100,000 in your trading account (or the equivalent in another currency). With that sort of capital many of you will be managing institutional money, perhaps as part of a hedge fund or commodity advisor. But this book will also be useful if, like me, you are trading your own money with a decent sized account, and are serious about futures trading.
This is not a book for beginners. I’m expecting you to have at least a rudimentary understanding of the futures market, and trading generally.
As long as you can legally trade futures, you will find this book useful regardless of where you are domiciled.
Fully systematic traders will be able to use this book without any difficulties, since all the strategies in this book are fully described using clear rules. But not everyone is comfortable with the idea of trading without human input. Unlike me, you may possess a genuine ability to use your intuition and experience to identify profitable trades that exceeds what a simple rule based system can do. If so, then it would make sense to use the strategies in this book as part of a discretionary trading setup, combining them with your own judgement to decide which trades to take.
You don’t need to be able to code to use the vast majority of strategies in this book. Almost everything here can be implemented in a spreadsheet. On the website for this book are links to spreadsheets that you can copy and adapt as you require. Having said that, there are also web links to snippets of Python code for those who are comfortable with programming.
Finally, there are many equations in this book, but almost all are at the level of high school math. You don’t need a PhD to read this book. I didn’t need one to write it!
From the introduction
I traded my first futures contract on instinct.
It was September 2002, and I had just stepped onto a trading floor for the first time. The floor was in Canary Wharf, one of London’s two key financial districts, and belonged to Barclays Capital. ‘Barcap’, as I had learned to call it, ran a programme for fresh graduates on which I had recently started as one of just two newly recruited traders. We spent our first day in a classroom learning tedious theory that was mostly unrelated to our future jobs. At 4pm we were told to go and find our future teammates, who we’d be joining properly in a couple of months after the gruelling course had finished. With some trepidation I glanced at the map of the floor I had been given, and tried to locate the area where I would ultimately be working. Fortunately it didn’t take long to find my allocated desk where I also found Richard – the managing director of the team – who had interviewed me earlier in the year.
After a few introductions and some chitchat, Richard asked me if I’d like to do a trade. I nervously said I would. Although I’d done some share trading on my personal account, this would be my first time trading with someone else’s money. He showed me the dealing screen, and asked me to trade a single contract of the December ‘Bund’, which I had recently learned was the future for 10-year German government bonds (one of the few useful pieces of information we’d been given in the classroom). I froze. Should I buy or sell? How could I possibly know what the right decision was? I’d read somewhere that the ability to make quick decisions was prized amongst traders, and I certainly didn’t want Richard to think I was too slow witted for the job. Not wanting to hesitate any longer, I decided to buy and clicked the button on the screen to lift the offer. That was my first foray into the futures market, and it certainly wouldn’t be my last, although I only lasted 18 months on that particular trading floor. After leaving Barcap I spent a couple of years working in economic research before joining a hedge fund, AHL.
AHL was, and is, one of the largest futures traders in the world. My job was to develop and manage systematic futures trading strategies. Beginning with a relatively small portfolio, I was eventually promoted to manage the fixed income team, responsible for several billion dollars of client funds. The strategies we managed were a significant part of the global futures markets, holding tens of thousands of contracts on any given day, and trading hundreds of thousands of contracts every year.
I decided to leave AHL in 2013, but my trading didn’t stop there. After opening a trading account with a futures broker, I spent a few months building my own automated trading strategies which I have run ever since. It’s now over 20 years since I traded that first contract, and a very long time since I last traded on instinct. Nowadays I trade deliberately, using carefully honed trading strategies. Every single one of the trades I do today is backed up by years of experience and detailed analysis. And in this book, I will share that knowledge with you.
What's in the book
Part One: Basic Directional Strategies: A directional strategy bets on the overall direction of the market rather than the relative performance of two or more instruments. The first four Parts of this book are exclusively about directional strategies. During Part One I also gradually introduce a number of concepts that you will need throughout the book.
Part Two: Advanced Trend Following and Carry Strategies explores in great depth two of the key strategies in futures trading: trend following (where we try and identify trends which we assume will continue) and carry (where we use futures prices for different expiry dates to try and predict the future). These two strategies are introduced towards the end of Part One, but in Part Two I extend them and explore alternative ways to capture these important market effects.
Part Three: Advanced Directional Strategies: Trend following and carry are directional strategies, but in Part Three I’ll explore other kinds of directional strategy that exploit other sources of returns.
Part Four: Fast Directional Strategies: Although this is not a book about high frequency trading, there are a couple of strategies included here whose holding period can be measured in hours and days, rather than weeks.
Part Five: Relative Value Strategies: As you might expect, these strategies try to predict the relative movement of futures prices, whilst hopefully hedging against overall market movements. In Part Five I will explain both calendar strategies – that trade different delivery months of the same future against each other – and cross instrument strategies, which trade the relative value of different futures.
Part Six: Tactics: These are not chapters about trying to predict the absolute or relative movement of prices. Instead they seek to improve the less glamorous but still important aspects of futures trading: contract selection, risk control, execution, and cash management.
Table of contents
Part one: Basic Directional Strategies
Strategy one: Buy and hold, single contract
Strategy two: Buy and hold with risk scaling
Strategy three: Buy and hold with variable risk scaling
Strategy four: Buy and hold portfolio with variable risk position sizing
Strategy five: Slow trend following, long only
Strategy six: Slow trend following, long and short
Strategy seven: Slow trend following with trend strength
Strategy eight: Fast trend following, long and short with trend strength
Strategy nine: Multiple trend following rules
Strategy ten: Basic Carry
Strategy eleven: Combined carry and trend
Part two: Advanced trend and carry
Strategy twelve: Adjusted trend
Strategy thirteen: Trend following and carry in different risk regimes
Strategy fourteen: Spot trend
Strategy fifteen: Accurate carry
Strategy sixteen: Trend and carry allocation
Strategy seventeen: Normalised trend
Strategy eighteen: Trend following asset classes
Strategy nineteen: Cross sectional momentum
Strategy twenty: Cross sectional carry
Part three: Advanced directional strategies
Strategy twenty one: Breakout
Strategy twenty two: Value
Strategy twenty three: Acceleration
Strategy twenty four: Skew – a case study
Strategy twenty five: Dynamic optimisation (for when you can’t trade the Jumbo portfolio)
Part four: Fast directional strategies
Strategy twenty six: Fast mean reversion
Strategy twenty seven: Safer fast mean reversion
Part five: Relative value strategies
Strategy twenty eight: Cross instrument spreads
Strategy twenty nine: Cross instrument triplets
Strategy thirty: Calendar trading strategies
Part six: Tactics
Tactic one: Rolling and contract selection
Tactic two: Execution
Tactic three: Cash and compounding
Tactic four: Risk management
Appendix A: Resources
Appendix B: Calculations
Appendix C: The Jumbo portfolio