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U.S. Yield Curve 2018 Play (FYT Strategy Giveaway)
Trading: Bonds of every country (AU/UK/CA/EU/US), Commodities (Soft, Hard, Metals), Currencies,
Posts: 24 since Oct 2016
Thanks Given: 11
Thanks Received: 132
Many hedge funds and algo shops have closed down because the VIX decided to make us cuckolds last year.
But this year, we have a very up-beat attitude from the new Fed Chairman. We should welcome him as our new Pimp Daddy. Unlike that previous wh0re, Powell is ready to hike rates and is serious about it.
His official statement was "the economy is looking even better than it did in December" which is key word for "get the f*ck out of your bond positions"
The U.S. yield curve is going to have a lot of play this year.
Important: Every single USA data figure of CPI, GDP and Wage-inflator index will be hot cakes and will carry serious risk if you're too over-committed.
Also; mega warning for FOMC minutes and FOMC meetings. They are ALL live this year and they will be plagued by a change of commentary that will cause vicious moves immediately upon release.
I am predicting a lot of people to get blown out this year but they will be saved by the first mean-reversion type recovery, the first time only. This is because we haven't seen big U.S. yield curve moves happen in a long time, so they will usually revert a lot the first time. Its just a nature of markets when they start changing their pattern, it's kind of a 'warning shot' to people on the side-lines. Think about someone who is only used to 5bp-10bp profits but gets paid 30bp for the first time in 2yrs.. they start covering.. anyway, more on this another time.
By the way, when I say revert, it could mean a longer time-frame. Don't mean-revert play a U.S. curve unless you want to be a greeter at Walmart for life just to repay your debts.
Anyway, to highlight my point for strategy hunting.. let's take a look at the FYT.
This is the chart-book ratio. 3*FVA-2*TYA
Play that ratio if you dare, but let's take a look closely;
Analysis
I took a random month, February. I observed the intraday behavior from 2014 and compared it to 2018 just now. Have a look at this;
Grindy all the way through. Each colour of the lines represents a different session (Asia = Red, Europe = Black, USA = Blue)
And now....
As you can see the move indicated by the large chode, we got nice mean-reversion play ready to suck people in.
This is a significant warning shot for the year. The 5-year note is about a 4.5 year basket duration of bonds... and the T-note is about 7.5 yrs. It's not carrying a lot of duration risk but there is significant movement coming along in the future.
The advantage of trading the interlink book is you don't have to use an autospreader, you can leave your order in the book and be filled if the Gods allow it.
8==D
Hunting for your own Fish
Now we get to the hard part. If you're going to survive this year, it will be because of research and hard work. Hard work means doing the work that no-one else wants to do. I'll tell you what it is at the very end;
Take a look at this;
I put a moving average on the U.S. FYT and just put envelopes around the moving average.
How to get settings;
1. Apply a moving average, I used period of the devils number = 66
2. Put an envelope on the moving average, I used 0.1 and 0.2 as integer
There is nothing special about the settings, they just look pretty.
What somebody starting off should do;
1. Look at three different time frames of this curve. Short-term (5-min), Medium-term (15-min) and Long-term (60-min). Open up an excel sheet and spend a weekend doing research...
2. Start with the short-term (5-min) and go back through every [24-hour period] for the past 6 months. You need to know what a big move is and what you need to set your stop at. This is the most crucial thing I do before I do any trade. You have to know your risk. Once your know your ultimate down-side, you can reverse engineer what targets you need.
Go back every day and record the net-change. I would start from Asia sessions open and do it to the U.S. Close.
Tip: Assume that the U.S. Cash/Bond session is your pillar move for the next day.
Here are some things to think about... to develop your own edge. Write this down in your spreadsheet along every day;
a) Was there a big move in the previous U.S. session?
b) Did we FOLLOW or RETRACE that move?
c) What are the chances of a FOLLOW and what is the chance of a RETRACE? (This is a simple excel sheet calculation, just count the days so you know the chances in your column data)
d) What caused the big move? Was it "0" (Nothing) or "1" (Probably Data)
e) Was other markets moving with this on the previous session? (Hint: For U.S. session moves... Did Oil, the Bund, or the Yen or the S&P500 do quite a significant move overnight?)
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Putting it together
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6-months of hand done research is very small. I do ~5 years (because 2012/2013 the volatility was much larger than 2014-2018 so far). But don't overwhelm yourself for now, that data is kind of irrelevant. You have to adapt to current conditions.
If you go through these steps you will see a pattern. Trust me, hours put in = efforts rewarded. No-one wants to do this. When you trade the follow-through session, are you fading the big moves overnight (S&P500, Oil, Yen etc.)? You need to know what train you are standing in-front.
Is there a better chance of fading the channel if there was no big move overnight?
Final note:
Many people will tell you that you can't win because of those amazing bots and those self-learning algorithms. Well, I just gave a strategy here which precisely takes advantage of these f@ggots. They're all correlated. They all move together. Lets use them to our advantage. They help make the train a straight-line for us.
I've shown you how to take a weakness and turn it into a strength. If the bots are correlating world markets and making them move together much more, then you can use this to your advantage. Remember, if everything is so strongly correlated now, when you have 4 train-wrecks happening, and your research shows that the 5th train-wreck (the FYT) is deadly from a certain side... you can start observing that selling 1-2-3 bullets on the same side will put you ahead of the game.
Hey s0mmi. Thanks so much for putting this together. I've seen you mention these written notes on levels etc in a spreadsheet. Can you show a screenshot or something similar of how you layout all that data?
Trading: Bonds of every country (AU/UK/CA/EU/US), Commodities (Soft, Hard, Metals), Currencies,
Posts: 24 since Oct 2016
Thanks Given: 11
Thanks Received: 132
The edge is specifically in spending time going through a trading product/spread and observing what it does over time. I found some homework that I got one of my traders to do as an assignment when he started.
If somebody told you that "Rule #2 & #3 should apply to this trade" it's really hard to apply this without conducting the research yourself and seeing it happen. It's as simple as going through the chart, day by day, and marking a giant fat red danger box in Excel so you can analyse that data in greater detail.
Example: The Aussie bonds swing a lot more in Roll-week than any other time. Does it mean your strategy should stop? Maybe. What about if you traded with wider entries and less size? There's always an answer.. a weapon you can choose for the conditions in-front of you.
Or.. you learn the hard way. Unfortunately, blowing an account and learning the hard way is impossible if you can't build the buffer in the first place.
Every single time I have spent weekends doing this research, or allocated my traders some work, there is always a tremendous amount of edge that comes out of it. You can't simply get in there every day and do the same thing, expecting a different result.
There are lots of lessons that you can derive by doing analysis, without making it too complicated. And it's not always the obvious ones like "e.g. Spread A mean-reverts the past year or Spread C really snowballs"
If anyone finds anything, share it here and I might tell you how to beat the numbers.
So what you have to do is....
Go through your trades for as long as you can (I do 5yrs) and find every single bad trade/day that happened and mark it and analyse the f*ck out of that day. Find out what moved, what didn't move, check ForexFactory for what data came out.
Was there an interest rate decision or red-tier data? Was there a big currency move of that localised country? Was there a big commodity move happening over-night, or happening as it occurred? What was the equity market doing?
I can honestly say that I have never seen anybody do this consistently and actually fail. However, I will say that not everyone is told you have to do these things because it's industry standard to keep it open-ended. Its really easy to be drawn to the whole "I don't believe in back-testing" or "Trading is an art form" ideology because that conveniently opens up your weekends and removes 10-20 working hours + thinking & conceptualizing hours from your load.
I wasn't ever good with manipulating data (I don't have any coding skills) so I had to go through my charts and go through every bad day and find out what was happening and colour code excel.
You'll soon realise the world is one giant portfolio and start to figure out what standing in-front of the world train looks like.
