Algorithmic Trading Strategies

Building ideas into profitable portfolio

Cumulative Equity 2008-2011

 Booklet series of the

Fudancy Research Group

VOLUME 10

M. Schoeffel (Nyon, Switzerland)

Algorithmic Trading Strategies
© Fudancy Technology 2011 all rights reserved worldwide.

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ABOUT

Fudancy Technology is a R&D entity focusing on coaching hedge funds and financial institutions and in developing
turnkey trading systems. We believe it's not about who we are. Research, performance and robustness of the systems
are what matters. That said, at Fudancy Technology, we all hold PHD degrees and we love what we do.
TABLE OF CONTENTS

CHAPTER I

From the idea to algorithm

CHAPTER II

Building the portfolio

CHAPTER III

Results for the last 4 years: 2008-2011

REFERENCES
APPENDIX
 I

From the idea to algorithm

In references [1-3], we have presented the theory and practice of the general search of small deviations with respect
to the random walk hypothesis in financial data.

We have then explored an idea based on Range Break Out strategies for intra-day data on commodity futures
based on a simple equation of motion:
dx = A(x-Rx) + Sigma dW

where x represents the price series, Rx is the price range and the couple (A,Sigma) are parameters of the equation.
In this expression, Sigma is the volatility and “A” is a coefficient that quantifies the deviation with the pure random
walk. When A is significantly non-zero and positive, this means that prices are expulsed from the range Rx. Then,
we tend to have a range break out phenomenon. On the contrary, when A is negative, this means that prices have a
tendency to be contained within the range Rx.

Based on a quantitative analysis of the price series [1], we have proposed a simple generic algorithm that translates
the idea into a well defined procedure:

i. Define a range Rx on a given time unit;

ii. Search for a range contraction or expansion;
iii. Use the item (ii) as a first trigger to search for an expulsion of the range. This means buy when the price is
above the highest highs of the range and sell is the price falls below the lowest lows of the range. We can add
an offset to the previous requirement depending on the tick size;
iv. In addition, define stop loses and profit limits (fixed or trailing) that protect and optimize the strategy.

The above algorithm has been proven to be reasonable in terms of its statistical significance and therefore can lead
to well defined strategies when applied on commodity futures: they are described in details in references [2-3].
II

Building the porfolio

Our requirements are very simple:

ü We want to build a portfolio based on working codes presented in details in references [2-3]. Typically, we
want to use 2 codes and each one needs to produce a comparable amount of profits.
ü We need to limit the maximum intra-day (and inter-trade) draw-down with respect to the initial equity to a level
below 10% and below 4/5% at month end.

This requirements lead to a portfolio of 100k usd running on our working codes on SILVER (SI) and
PLATINUM (PL) with weights 1 and 3 respectively. This means that each trade for SI is done within 1 futures
contract and each trade on PL within 3 contracts. Note also that PL and SI can be traded simultaneously.

III

Results for the last 4 years:

2008-2011

The portfolio defined in chapter II leads to the following gross results (all net of fees):

The average monthly return is 2.9% and the portfolio makes a profit of 135% in 4 years.

This corresponds to a very good Sharpe ratio:

For information, we provide the total fees paid within the analysis period:

In USD, the global results expressed above in % read:

These results are significant as the number of trades is large (1032) and therefore can be considered as meaningful
statistically:

The results per trade read:

We can summarize the above outputs into a cumulative equity for the global portfolio considered here:

Finally, let us present the intra-day maximum draw-down (MDD) of the portfolio:

This was part of our requirements to get this MDD below 10% as a % of the initial equity. This requirement has
defined the size of the portfolio (100k usd) in view of the 2 codes and their respective weights.

More outputs of the portfolio are presented in the APPENDIX.

Obviously, this is not possible to get a 135% global return (net of fees) on the analysis period without a certain level
of MDD. Profits need a part of risk that we quantify here within our working codes and working portfolio.

To conclude, we have shown in this booklet how to terns ideas [1-3] into clear profits. This is really our major
purpose in these series of research papers.
REFERENCES
[1] Algorithmic Trading - Algorithmic Trading Strategies – Example on Commodity futures [Kindle Edition],
Fudancy Research.
http://www.amazon.com/Algorithmic-Trading-Strategies-Commodity-ebook/dp/B0078NN9L4/ref=sr_1_3?
s=digital-text&ie=UTF8&qid=1329651208&sr=1-3

[2] Algorithmic Trading - Algorithmic Trading Strategies – Working Codes on Natural Gas and Platinum
[Kindle Edition], Fudancy Research.
http://www.amazon.com/Algorithmic-Trading-Strategies-Platinum-ebook/dp/B00791LBSI/ref=sr_1_1?s=digital-
text&ie=UTF8&qid=1329651208&sr=1-1

[3] Algorithmic Trading - Algorithmic Trading Strategies – Working Codes on Silver [Kindle Edition], Fudancy
Research.
http://www.amazon.com/Algorithmic-Trading-Strategies-Working-ebook/dp/B00791WFEC/ref=sr_1_4?s=digital-
text&ie=UTF8&qid=1329651208&sr=1-4

APPENDIX
Monthly returns:

Daily equity with its trend: