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.