CFD Sector Strategy
Enter a long trade on a sector when the 10 day moving average crosses above the 30 day moving average and enter a short trade when the 10 day moving average crosses down through the 30 day moving average. Enter at open the next morning and employ a stop loss at 3% below or above the entry price.
The logic behind the strategy is that at least one of the sectors will be trending strongly overcoming the losses on the sectors that are not performing. The worst case for this strategy is a tightly range bound market.
Over a 5 year period all sectors were profitable except Telecommunications. Consumer Staples was the next worst performing sector outside of telecommunications. Telecommunications in Australia is dominated by Telstra and Telstra is not a very volatile share. Consumer Staples is also not a particularly volatile sector as these businesses perform in all economic conditions.
Historically the strategy produces a minimum of 10% per annum with returns over 20% in two sectors without employing any leverage. Adding leverage can make this a very attractive trading strategy.
In live trading I chose to remove Telecommunications and Consumer Staples sectors from the test. I entered a small position on all signals since mid September 2005 in my own trading account. Stops were set at a loss of close to $300. The trades are listed below.
| Date | Code | Short | Entry | Stop | Risk | Contracts | Position | Exit | Profit/Loss |
|---|---|---|---|---|---|---|---|---|---|
| 19/10/2005 | XEJ | Short | 9899 | 10100 | -201.00 | 1 | 9899 | 10224 | -325.00 |
| 21/10/2005 | XMJ | Short | 7855 | 8336 | -481.00 | 1 | 7855 | 8340 | -485.00 |
| 21/10/2005 | XFJ | Short | 5169 | 5301 | -264.00 | 2 | 10338 | 5318 | -298.00 |
| 11/10/2005 | XNJ | Short | 5126 | 5300 | -348.00 | 2 | 10252 | 5264 | -276.00 |
| 21/10/2005 | XUJ | Short | 5055 | 5250 | -390.00 | 2 | 10110 | 5303 | -496.00 |
| 10/10/2005 | XDJ | Short | 2256 | 2305 | -245.00 | 5 | 11280 | 2269 | -65.00 |
| 13/10/2005 | XIJ | Short | 409 | 425 | -80.00 | 5 | 2045 | 417 | -40.00 |
| 13/10/2005 | XIJ | Short | 409 | 425 | -80.00 | 5 | 2045 | 426 | -85.00 |
| 01/11/2005 | XFJ | Long | 5330 | 5230 | -200.00 | 2 | 10660 | 5646 | 632.00 |
| 01/11/2005 | XHJ | Long | 5846 | 5670 | -352.00 | 2 | 11692 | 6375 | 1058.00 |
| 01/11/2005 | XIJ | Long | 431 | 409 | -220.00 | 10 | 4310 | 427 | -40.00 |
| 02/11/2005 | XMJ | Long | 8389 | 8300 | -89.00 | 1 | 8389 | 9503 | 1114.00 |
| 06/11/2005 | XUJ | Long | 5255 | 5250 | -10.00 | 2 | 10510 | 5604 | 698.00 |
| 06/11/2005 | XNJ | Long | 5281 | 5215 | -131.00 | 2 | 10561 | 5463 | 365.00 |
| 23/11/2005 | XEJ | Long | 10326 | 9990 | -336.00 | 1 | 11401 | 11480 | 1154.00 |
| 24/11/2005 | XDJ | Long | 2269 | 2190 | -395.00 | 5 | 11345 | 2217 | -260.00 |
| 08/12/2005 | XDJ | Short | 2217 | 2280 | -315.00 | 5 | 11085 | 2254 | -185.00 |
| 24/12/2005 | XIJ | Short | 427 | 444 | -170.00 | 10 | 4270 | 444 | -170.00 |
| 04/01/2006 | XDJ | Long | 2254 | 2190 | -320.00 | 5 | 11270 | 2252 | -10.00 |
| 09/01/2006 | XIJ | Long | 444 | 427 | 10 | 4440 | 444 | 0.00 | |
| Total | $2286.00 |
* Past performance is no guarantee of future performance.
The profit for this period of approximately 3 months is $2286, noting that many of the positions are still open on the 9th January 2006.
The results are summarised in the table below.
| Gains | 7 |
| Losses | 12 |
| Hit Rate | 37% |
| Average Gain | $716.00 |
| Average Loss | -$227.00 |
| Edge Ratio | 3.15 |
| Margin Required | $880.00 |
| Return on Margin | 260% |
| Largest Drawdown | -$2070.00 |
| Capital Required | $3000.00 |
| Return on Capital | 76% |
| Annualised ROC | 305% |
The results are typical of a trend following system with a hit rate of 37% and an edge ratio of 3.15. The margin required for the current positions held, which are approximately $11,000 each, is only $880. More capital is required than just margin money to cover any losses that may occur. The capital required to complete all these trades taking into account a string of losses upfront would be $3000. The return for the 3 month period is 76% and if annualised looks likely to be a return close to 300%.
The strategy has been tested historically and traded profitably in the past.