Downtrend Algorithm and Hedging Strategy in Futures Market

Authors: S. Masteika, A.V. Rutkauskas, A. Tamosaitis

Abstract:

The paper investigates downtrend algorithm and trading strategy based on chart pattern recognition and technical analysis in futures market. The proposed chart formation is a pattern with the lowest low in the middle and one higher low on each side. The contribution of this paper lies in the reinforcement of statements about the profitability of momentum trend trading strategies. Practical benefit of the research is a trading algorithm in falling markets and back-test analysis in futures markets. When based on daily data, the algorithm has generated positive results, especially when the market had downtrend period. Downtrend algorithm can be applied as a hedge strategy against possible sudden market crashes. The proposed strategy can be interesting for futures traders, hedge funds or scientific researchers performing technical or algorithmic market analysis based on momentum trend trading.

Keywords: trading algorithm, chart pattern, downtrend trading, futures market, hedging

Digital Object Identifier (DOI): doi.org/10.5281/zenodo.1081864

References:

[1] Schmidt G., Mohr E., Kersh M., Experimental Analysis of an Online Trading Algorithm. Electronic notes in Discrete Mathematics (36): 519- 526 (2010)
[2] Izumi K., Toriumi F., Matsui H., Evaluation of automated- trading strategies using an artificial market. Neurocomputing 72(16-18): 3469- 3476 (2009)
[3] Dempster M.A.H., Leemans V., An automated FX trading system using adaptive reinforcement learning. Expert systems with applications (Intelligent information systems for financial engineering) 30(3): 543- 552 (2006)
[4] Fong S., Tai J., The Application of Trend Following Strategies in Stock Market Trading. Proceedings of Fifth International Joint Conference on INC, IMS and IDC, pp.1971-1976 (2009)
[5] Harris Richard D.F., Yilmaz F., A Momentum trading strategy based on the low frequency component of the exchange rate. Journal of Banking&Finance, Vol.33(9): 1575-1585 (2009)
[6] Serban A.F., Combining mean reversion and momentum trading strategies in foreign exchange markets. Journal of Banking&Finance, 34(11): 2720-2727 (2010)
[7] Acworth Will, "Record Volume 2010 (Annual Volume Survey)", Futures Industry, March: 12-29 (2011)
[8] Kirkpatrick II, C.D.; Dahlquist, J.R. Technical Analysis: The Complete Resource for Financial Market Technicians. Second Edition. FT Press (2010)
[9] Masteika S., Short term trading strategy based on chart pattern recognition and trend trading in Nasdaq Biotechnology stock market. Proceedings of 13th International Conference of Business Information Systems, Springer:51-57, (2010)
[10] Zubulake P., Lee S., The High Frequency game changer: how automated trading strategies have revolutionized the markets. Wiley Trading. Aite Group, 2011, pp. 47-87.
[11] Montier J., The little book of behavioral investing. John Wiley & Sons, 2010, pp.154-155.
[12] Miffre J., Rallis G. Momentum strategies in commodity futures markets. Journal of Banking&Finance, Vol.31(6): 1863-1886 (2007)
[13] Szakmary A.C., Shen Q., Sharma S.C. Trend-following trading strategies in commodity futures: A re-examination. Journal of Banking & Finance, Vol.34(2): 409-426 (2010)
[14] Friesen, G.C., Weller P.A., Dunham L.M. Price trends and patterns in technical analysis: a theoretical and empirical examination. Journal of Banking&Finance, Vol. 33(6): 1089-1100 (2009)
[15] Gomber P., Arndt B., Lutat M., Uhle T., High-Frequency Trading, e- Finance, Commissioned by Deutsche Borse Group, e-paper: http://es.scribd.com/roffem/d/89985411/26-Other-High-Frequency- Trading-Strategies
[16] Burghardt G. Measuring the impact of trend following in the CTA space. Opalesque interview, 2010.
[17] Schwager Jack D. The New Market Wizards: Conversations with America-s top traders, Marketplace Books, 2008, p.614.
[18] Bulkowski, T.N. Encyclopedia of Chart Patterns. Wiley, 2005.
[19] Elder Alexander, Trading for a Living: Psychology, Trading Tactics, Money Management. Wiley, 1993, p.p.69-101
[20] Mandelbrot B.B., Gomory R.E., Cootner P.H., Fama E.F., Morris W.S., Taylor H.M., Fractals and Scaling in Finance: Discontinuity, Concentration, Risk. Springer, 2010, p.561.
[21] Mandelbrot B.B, Hudson R.L. ,The (mis)behavior of markets: A Fractal view of financial turbulence, Basic books, 2006, p.368.
[22] Williams B.M., Williams J.G., Trading chaos: maximize profits with proven technical techniques, 2nd edition, John Wiley & Sons, Inc., 2004, p.228.
[23] Williams. B., New Trading Dimensions, John Wiley & Sons, 1998, p. 288.
[24] Kleinman G., Trading Commodities and Financial Futures: A step by step Guide to Mastering the Markets, 3rd Edition, FT Press, 2004, p.258
[25] Masteika, S., Rutkauskas A.V., Alexander Janes A. Continuous futures data series for back testing and technical analysis. Conference proceedings, 3rd International Conference on Financial Theory and Engineering. IACSIT Press, vol.29, 2012, pp. 265-269.
[26] Pelletier Bob, Computed contracts: Their Meaning, Purpose and Application/ An Essay on Computed Contracts// http://www.csidata.com/cgi-bin/getManualPage.pl?URL=essay.htm (referred on 14/06/2011)