Saturday, 13 February 2016

Fashion, trends and CTA strategies

17:12 Posted by The Thalesians (@thalesians) 3 comments

I'll confess, understanding fashion has never been my strong point. My uniform for much of my career working in investment banks was simply an ill fitting suit. I eventually worked out that a suit, which was the right size, might actually be a good idea. In recent years, since quitting banking, working as a full time quant strategist at the Thalesians, my uniform has been the humble t-shirt and jeans. I shall leave that up to you to decide whether I possess a modicum of dress sense....

Despite that, the little that I do know about fashion is that trends play a big part in it. If some such celebrity, who I probably don't know the identify of, suddenly wears an item of unusual clothing, it becomes "trendy" to wear it. If an item appears on the catwalk, high street brands will scramble to produce similar items, and then suddenly everyone is wearing it. Fashion trends seem infectious. Then after a while people tire of a fashion and the trend is extinguished. Fashions move in cycles, punctuated by the seasons, items of clothing seem to come in and out of fashion decade after decade.

Trends are obviously not purely restricted to fashion. Markets exhibit trends. There's that hot IPO, which has attracted lots of media interest, that market participants are desperate to get hold of. There's that new startup, which no one cared about, until a few big venture capital funds decided to invest. There's that currency that was languishing near the lows, till a smart hedge fund manager decided to buy, precipitating interest in that currency, from the rest of the market. We see an asset trend upwards on a chart, and suddenly, human behaviour gets involved and we want to buy, we don't want to miss that move! I could give countless examples of this type of herd behaviour in markets, which mirrors that we see in fashion. We all claim to be immune from it, yet, the fact that there are trends in the market seems to say otherwise.

Even if we ignore the behavioural argument for trends, the presence of an economic cycle gives rise to market trends. At the beginning of an economic cycle, we might expect materials stocks to outperform, as companies begin to invest in infrastructure. Countries which export commodities also tend to benefit. As the economic cycle wanes, commodities become less bid, and investors shift towards preservation of capital as the recession approaches, shifting from equities towards bonds.

Whilst the old maxim says "buy low, sell high", to be a trend follower in markets, you do precisely the opposite. You buy high, on an expectation of price action going higher. Conversely, you sell low, expecting the price to continue drifting lower. CTA, or commodity trading advisors have been around for around for decades. Typically they use systematic trading models, which are trend following, to make trading decisions. But how precisely do they go about it? At Global Derivatives in May, which will be in Budapest for the very first time, I'll be presenting my paper "How to build a CTA?" to help answer this!

I'll be examining the various technical indicators which can be used to generate trend following signals. I'll also be showing, how trading multiple asset classes from a trend following perspective can improve risk adjusted returns, compared to focusing on a single asset class. I'll be looking at historical results which show how trend following can help diversify the returns of long only equity and bond investors. To round off the discussion, there will be an interactive demo of how to implement a simple FX CTA type strategy in Python using my open source PyThalesians library (download the code from GitHub here).

If you want to know more about what a CTA does, hopefully see you at my talk at Global Derivatives in May! I promise I won't be attempting to tell you about my fashion sense at the same time....

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our group for more details here (Thalesians calendar below)

16 Feb - New York - Thalesians/IAQF - Harry Mamaysky - Does Unusual News Forecast Market Stress?
29 Feb - London - Jessica James - FX option trading
14 Mar - San Francisco - Quant Fintech Mixer Event
15 Mar - New York - Thalesians/IAQF - Alex Lipton - Modern Monetary Circuit Theory
21 Mar - London - Robin Hanson - Robin Hanson, Economics when robots rule the Earth
20 Apr - London - Oskar Mencer - FRTB, RWA, XVA, Scenarios, MiFiD II, fast?
13 May - Budapest - Saeed Amen/Paul Bilokon - Thalesians workshop on algo trading at Global Derivatives