There's no surprise that the commercial traders are buyers ahead of seasonal strength.
Our Discretionary COT Signals subscribers got a one week jump on the forecasted strength of our seasonal analysis, which went out last night. Our seasonal model has forecasted a period of strength for this year beginning last night and lasting through the first week of January. We run these models a few different ways to build a composite actionable trading plan. First, we’ll provide a generic performance report, similar to what you’ll find on any trading application.
These are the out of sample, composite performance results.
*Past performance is no guarantee of future performance.
These are easy to read and provide valuable information. However, deeper metrics allow us to rip the string of trades apart and stitch them back together in random fashion. The more times we do this, the more likely we are to account for good results based on a given slice of time and price data. In other words, it helps eliminate curve fitting and validates the model’s prognostication abilities. Let’s look at the Monte Carlo analysis.
These are the performance results of 1,000 out of sample Monte Carlo runs.
*Past performance is no guarantee of future profits.
The most important metric in this chart is the Average Return column. Successful trading is all about the adage of cutting losses short and letting winners run. The Average Return column tells us that we can expect a winner around $910 at the mean. Meanwhile, the Standard Deviation of these returns is approximately one-third of the average. This tells us that performance has been relatively consistent because the spread between the mean and the standard deviation is rather large. This also means that a trade in the third standard deviation to the downside may still be profitable. This is one of the ways we quantify the risk/reward equation.
Finally, let’s look at the correlation between our seasonal analysis and the Australian dollar’s performance. This will explain the importance of de-trending the input signal.
Seasonal program equity plotted against the Australian dollar futures.
*Past performance is no guarantee of future profits.
The Australian dollar was in a protracted downward trend through trade numbers nine through twelve. While the underlying instrument lost nearly 25% of its value, the seasonal trading program remained fairly stable, despite losing two out of three trades during this period.
Trading is a lot of hard work. It wasn’t easy when we kept charts by hand, and it’s not any easier using today’s technology. We continue to evolve by stacking the odds in our favor. The one-two punch of the commercial traders’ support and structural seasonal support is a good start in that direction.
About the Author
Andy Waldock, owner of the brokerage firm Commodity & Derivative Advisors and the subscription service COTSignals.com, is a third generation commodity trader with over 25 years of experience on all of the main U.S. exchanges. Andy stays abreast of modern programming developments due to the trading programs he employs for his own account and managed money. He can be reached at www.andywaldock.com.