Ultimate Algorithmic Trading System

The correlation coefficients range from +1to−1. A coefficient of +1 represents
a 100 percent correlation and a coefficient of −1 also represents a 100 percent
correlation, but in the opposite direction. The AD (Australian dollar) is highly
correlated to GC (gold), but not very much to the CU (Euro currency), and is highly
anticorrelated to DX (dollar index). If you were picking two currencies, then you
would probably want to go with the AD and CU. The BP is a little too noncorrelated
for my taste. So let’s pick the AD and CU to represent the currencies. Moving
onto energies the crude is highly correlated to both the heating oil and natural
gas. Unleaded is a different story; there is very little correlation there. CL and RB
(unleaded) will take care of the energies sector. The grains consist of soybeans, corn,
Kansas City wheat, Chicago wheat, corn, and a few other low-volume components.
According to the correlation matrix, a good mix would be the corn and KC wheat.
The financials are up next and are represented by 30-year Treasury bonds, 10-year
notes, 5-year notes, 2-year notes, and Eurodollars. All these markets are highly
correlated to each other, so there is no advantage/diversification by trading one
with another. Trading a Treasury bond with Treasury note is like trading two bonds.
Bonds are very shock sensitive to news events such as Fed and employment situation
reports. So the less volatile but still with some bang is the Treasury notes. The safest
soft commodity is sugar (SB). It trends well and seems less sensitive to crop reports
than coffee (KC) or cotton (CT). There is very little correlation among these three
markets so any one of the three would probably suffice. All of the metals in the
current portfolio, silver (SV), gold (GC), copper (HG), and platinum (PL), are,
as you would assume, highly correlated, so like the financials only one should be
chosen for this initial portfolio. Copper is the only nonprecious metal in the list and
used extensively in manufacturing so let’s pick it. The initial portfolio will consist of
the following markets: AD, CU, CL, RB, TY, C, KW, SB, and HG. You will notice
that the stock indices were left out. The indices are a totally different animal. In an
interview with Richard Dennis by Arthur Collins, the King Turtle stated:
With the exception of the S&Ps, they’re all the same. You have to
treat them the same, for no reason other than sample size. You can
optimize each system in each market individually or you can optimize
them together. It’s better to optimize them together.
—Technical Analysis of Stocks and Commodities, April 2005
Issue
101
COMPLETE TRADING ALGORITHMS
An Act of Futility?
Okay, we now have a portfolio but on which algorithm should we risk our
capital? Also should we use the best-optimized parameters for each algorithm that
was derived from the global optimizations? Any of the four algorithms could be
used—they all showed positive expectancy. The ‘‘optimal’’ parameters that we
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