Friday, March 11, 2011

Momentum strategies in futures and forex

I have long found that it is easier to find good (i.e. high Sharpe ratio) mean-reverting strategies than good momentum strategies. Partly, that is because I was mainly a stock trader instead of a futures/currencies trader, and individual stocks mean-revert most of the time. There are exceptions, such as after special corporate events such as earnings announcements, and I have tested momentum strategies based on these events. But the success of even these event-driven strategies has been uneven, especially since more traders become aware of them.

64 comments:

I generally trust your book reccommendations, but a quick google search on this one looks dubious. Claims of 1000% annualized returns, etc. Are you sure about this one?

At SensoBeat (www.sensobeat.com) we assume there is a momentum to news items, and we try to track that momentum (stock buzz). We do it just for stocks but can be adapted to other fields as well, as long as they can have a buzz. We thought of using it for algo-trading, which is more relevant to you but making it fully automatic was a big problem. E.g. the sentiment of a news item is positive, but if it misses the expectations, the effect is negative. We decided to go for a decision-helping tool, that the trader does the final decision. Would be interesting to hear what professional algo-traders think of the idea

Anon,

As I mentioned in my book, I seldom find any published strategy profitable as is. Often, it wont even stand up to backtesting, not to mention live trading. So I wont put too much weight on the 1000% claim. The important take-away from the book is some techniques I didnt know before which I can modify and improve on.

John,

Thanks for your idea. Actually, this reminds me of a whole class of momentum strategies that I read about: basically holding a long-short portfolio based on some simple ranking criteria such as the lagged returns as you suggested. Apparently this works not only in stocks, but in commodities futures too. (Google the paper by Joelle Miffre and Georgios Rallis called Momentum in Commodity Futures Markets).

The problem for me (but not necessarily for, say, pension funds) is that the holding period is too long, and the return comparatively low. The long holding period necessarily imply that the portfolio suffers interim volatility thus suppressing the Sharpe ratio. Which is not to say that your suggestion necessarily has this problem.

Thanks for sharing your product with us. In this context, I should mention that the company Ravenpack has a similar news sentiment indicator which I believe can be used for algorithmic trading, and Ravenpacks indicators can be integrated into Alphacet Discoverys platform.

Also, if one is interested in news gathered from the internet but not necessarily from financial newswire, the company Recorded Future also offers similar sentiment data through an API suitable for algorithmic trading.