Downtrend Algorithm and Hedging Strategy in Futures Market
The paper investigates downtrend algorithm and
trading strategy based on chart pattern recognition and technical
analysis in futures market. The proposed chart formation is a pattern
with the lowest low in the middle and one higher low on each side.
The contribution of this paper lies in the reinforcement of statements
about the profitability of momentum trend trading strategies.
Practical benefit of the research is a trading algorithm in falling
markets and back-test analysis in futures markets. When based on
daily data, the algorithm has generated positive results, especially
when the market had downtrend period. Downtrend algorithm can be
applied as a hedge strategy against possible sudden market crashes.
The proposed strategy can be interesting for futures traders, hedge
funds or scientific researchers performing technical or algorithmic
market analysis based on momentum trend trading.
[1] Schmidt G., Mohr E., Kersh M., Experimental Analysis of an Online
Trading Algorithm. Electronic notes in Discrete Mathematics (36): 519-
526 (2010)
[2] Izumi K., Toriumi F., Matsui H., Evaluation of automated- trading
strategies using an artificial market. Neurocomputing 72(16-18): 3469-
3476 (2009)
[3] Dempster M.A.H., Leemans V., An automated FX trading system using
adaptive reinforcement learning. Expert systems with applications
(Intelligent information systems for financial engineering) 30(3): 543-
552 (2006)
[4] Fong S., Tai J., The Application of Trend Following Strategies in Stock
Market Trading. Proceedings of Fifth International Joint Conference on
INC, IMS and IDC, pp.1971-1976 (2009)
[5] Harris Richard D.F., Yilmaz F., A Momentum trading strategy based on
the low frequency component of the exchange rate. Journal of
Banking&Finance, Vol.33(9): 1575-1585 (2009)
[6] Serban A.F., Combining mean reversion and momentum trading
strategies in foreign exchange markets. Journal of Banking&Finance,
34(11): 2720-2727 (2010)
[7] Acworth Will, "Record Volume 2010 (Annual Volume Survey)",
Futures Industry, March: 12-29 (2011)
[8] Kirkpatrick II, C.D.; Dahlquist, J.R. Technical Analysis: The Complete
Resource for Financial Market Technicians. Second Edition. FT Press
(2010)
[9] Masteika S., Short term trading strategy based on chart pattern
recognition and trend trading in Nasdaq Biotechnology stock market.
Proceedings of 13th International Conference of Business Information
Systems, Springer:51-57, (2010)
[10] Zubulake P., Lee S., The High Frequency game changer: how automated
trading strategies have revolutionized the markets. Wiley Trading. Aite
Group, 2011, pp. 47-87.
[11] Montier J., The little book of behavioral investing. John Wiley & Sons,
2010, pp.154-155.
[12] Miffre J., Rallis G. Momentum strategies in commodity futures markets.
Journal of Banking&Finance, Vol.31(6): 1863-1886 (2007)
[13] Szakmary A.C., Shen Q., Sharma S.C. Trend-following trading
strategies in commodity futures: A re-examination. Journal of Banking
& Finance, Vol.34(2): 409-426 (2010)
[14] Friesen, G.C., Weller P.A., Dunham L.M. Price trends and patterns in
technical analysis: a theoretical and empirical examination. Journal of
Banking&Finance, Vol. 33(6): 1089-1100 (2009)
[15] Gomber P., Arndt B., Lutat M., Uhle T., High-Frequency Trading, e-
Finance, Commissioned by Deutsche Borse Group, e-paper:
http://es.scribd.com/roffem/d/89985411/26-Other-High-Frequency-
Trading-Strategies
[16] Burghardt G. Measuring the impact of trend following in the CTA space.
Opalesque interview, 2010.
[17] Schwager Jack D. The New Market Wizards: Conversations with
America-s top traders, Marketplace Books, 2008, p.614.
[18] Bulkowski, T.N. Encyclopedia of Chart Patterns. Wiley, 2005.
[19] Elder Alexander, Trading for a Living: Psychology, Trading Tactics,
Money Management. Wiley, 1993, p.p.69-101
[20] Mandelbrot B.B., Gomory R.E., Cootner P.H., Fama E.F., Morris W.S.,
Taylor H.M., Fractals and Scaling in Finance: Discontinuity,
Concentration, Risk. Springer, 2010, p.561.
[21] Mandelbrot B.B, Hudson R.L. ,The (mis)behavior of markets: A Fractal
view of financial turbulence, Basic books, 2006, p.368.
[22] Williams B.M., Williams J.G., Trading chaos: maximize profits with
proven technical techniques, 2nd edition, John Wiley & Sons, Inc.,
2004, p.228.
[23] Williams. B., New Trading Dimensions, John Wiley & Sons, 1998, p.
288.
[24] Kleinman G., Trading Commodities and Financial Futures: A step by
step Guide to Mastering the Markets, 3rd Edition, FT Press, 2004, p.258
[25] Masteika, S., Rutkauskas A.V., Alexander Janes A. Continuous futures
data series for back testing and technical analysis. Conference
proceedings, 3rd International Conference on Financial Theory and
Engineering. IACSIT Press, vol.29, 2012, pp. 265-269.
[26] Pelletier Bob, Computed contracts: Their Meaning, Purpose and
Application/ An Essay on Computed Contracts//
http://www.csidata.com/cgi-bin/getManualPage.pl?URL=essay.htm
(referred on 14/06/2011)
[1] Schmidt G., Mohr E., Kersh M., Experimental Analysis of an Online
Trading Algorithm. Electronic notes in Discrete Mathematics (36): 519-
526 (2010)
[2] Izumi K., Toriumi F., Matsui H., Evaluation of automated- trading
strategies using an artificial market. Neurocomputing 72(16-18): 3469-
3476 (2009)
[3] Dempster M.A.H., Leemans V., An automated FX trading system using
adaptive reinforcement learning. Expert systems with applications
(Intelligent information systems for financial engineering) 30(3): 543-
552 (2006)
[4] Fong S., Tai J., The Application of Trend Following Strategies in Stock
Market Trading. Proceedings of Fifth International Joint Conference on
INC, IMS and IDC, pp.1971-1976 (2009)
[5] Harris Richard D.F., Yilmaz F., A Momentum trading strategy based on
the low frequency component of the exchange rate. Journal of
Banking&Finance, Vol.33(9): 1575-1585 (2009)
[6] Serban A.F., Combining mean reversion and momentum trading
strategies in foreign exchange markets. Journal of Banking&Finance,
34(11): 2720-2727 (2010)
[7] Acworth Will, "Record Volume 2010 (Annual Volume Survey)",
Futures Industry, March: 12-29 (2011)
[8] Kirkpatrick II, C.D.; Dahlquist, J.R. Technical Analysis: The Complete
Resource for Financial Market Technicians. Second Edition. FT Press
(2010)
[9] Masteika S., Short term trading strategy based on chart pattern
recognition and trend trading in Nasdaq Biotechnology stock market.
Proceedings of 13th International Conference of Business Information
Systems, Springer:51-57, (2010)
[10] Zubulake P., Lee S., The High Frequency game changer: how automated
trading strategies have revolutionized the markets. Wiley Trading. Aite
Group, 2011, pp. 47-87.
[11] Montier J., The little book of behavioral investing. John Wiley & Sons,
2010, pp.154-155.
[12] Miffre J., Rallis G. Momentum strategies in commodity futures markets.
Journal of Banking&Finance, Vol.31(6): 1863-1886 (2007)
[13] Szakmary A.C., Shen Q., Sharma S.C. Trend-following trading
strategies in commodity futures: A re-examination. Journal of Banking
& Finance, Vol.34(2): 409-426 (2010)
[14] Friesen, G.C., Weller P.A., Dunham L.M. Price trends and patterns in
technical analysis: a theoretical and empirical examination. Journal of
Banking&Finance, Vol. 33(6): 1089-1100 (2009)
[15] Gomber P., Arndt B., Lutat M., Uhle T., High-Frequency Trading, e-
Finance, Commissioned by Deutsche Borse Group, e-paper:
http://es.scribd.com/roffem/d/89985411/26-Other-High-Frequency-
Trading-Strategies
[16] Burghardt G. Measuring the impact of trend following in the CTA space.
Opalesque interview, 2010.
[17] Schwager Jack D. The New Market Wizards: Conversations with
America-s top traders, Marketplace Books, 2008, p.614.
[18] Bulkowski, T.N. Encyclopedia of Chart Patterns. Wiley, 2005.
[19] Elder Alexander, Trading for a Living: Psychology, Trading Tactics,
Money Management. Wiley, 1993, p.p.69-101
[20] Mandelbrot B.B., Gomory R.E., Cootner P.H., Fama E.F., Morris W.S.,
Taylor H.M., Fractals and Scaling in Finance: Discontinuity,
Concentration, Risk. Springer, 2010, p.561.
[21] Mandelbrot B.B, Hudson R.L. ,The (mis)behavior of markets: A Fractal
view of financial turbulence, Basic books, 2006, p.368.
[22] Williams B.M., Williams J.G., Trading chaos: maximize profits with
proven technical techniques, 2nd edition, John Wiley & Sons, Inc.,
2004, p.228.
[23] Williams. B., New Trading Dimensions, John Wiley & Sons, 1998, p.
288.
[24] Kleinman G., Trading Commodities and Financial Futures: A step by
step Guide to Mastering the Markets, 3rd Edition, FT Press, 2004, p.258
[25] Masteika, S., Rutkauskas A.V., Alexander Janes A. Continuous futures
data series for back testing and technical analysis. Conference
proceedings, 3rd International Conference on Financial Theory and
Engineering. IACSIT Press, vol.29, 2012, pp. 265-269.
[26] Pelletier Bob, Computed contracts: Their Meaning, Purpose and
Application/ An Essay on Computed Contracts//
http://www.csidata.com/cgi-bin/getManualPage.pl?URL=essay.htm
(referred on 14/06/2011)
@article{"International Journal of Business, Human and Social Sciences:62845", author = "S. Masteika and A.V. Rutkauskas and A. Tamosaitis", title = "Downtrend Algorithm and Hedging Strategy in Futures Market", abstract = "The paper investigates downtrend algorithm and
trading strategy based on chart pattern recognition and technical
analysis in futures market. The proposed chart formation is a pattern
with the lowest low in the middle and one higher low on each side.
The contribution of this paper lies in the reinforcement of statements
about the profitability of momentum trend trading strategies.
Practical benefit of the research is a trading algorithm in falling
markets and back-test analysis in futures markets. When based on
daily data, the algorithm has generated positive results, especially
when the market had downtrend period. Downtrend algorithm can be
applied as a hedge strategy against possible sudden market crashes.
The proposed strategy can be interesting for futures traders, hedge
funds or scientific researchers performing technical or algorithmic
market analysis based on momentum trend trading.", keywords = "trading algorithm, chart pattern, downtrend trading,
futures market, hedging", volume = "6", number = "10", pages = "2662-6", }
