Barjon's Money Machine

[ChocolateDigestive]

aaah, calm down chaps. I gave the thread it's title with tongue in cheek as toastie says and all I'm doing is opening up the strategy and giving some numbers for you to make of what you will.

And hats off to you sir for posting it. I am sure you have considered but would it be preferable to pull exchange data into a spreadsheet and code up an automated stop.i guess the problem here will be interfacing with a SB provider. Should be straight forward with futures and most platforms but then that brings in other considerations.

Thread of the year if the flames die down!

 

[barjon]

That's what Howard said, sir... 😛

😆 yes, but you were able to demonstrate the disaster risk he was running. Can you with this? I'd be pleased to hear it if you can because I can't.

 

[scose-no-doubt]

Right now that c0cks have been put away I'd like to point out that I have regressed the year-to-date spread ratio against the usd/gbp exchange rate and the fellation coefficient comes out at 0.272574292 suggesting very weak relationship i.e. not much currency risk - this year. At least not in the way DT seems to think it works. I don't have fancy data packs but if someone wants to give me a sh8 load of data I'll analyse it all to keep proving that everything I've said was right all along 🙂 that basically, you're trading liquidity re: the aggregate economic exposure of UK vs US index constituents or possibly supply/demand pricing imbalances as money flows into one rather than the other.

I suggest that the thread would be a lot better if people put up theory supported by numbers rather than just tongue flapping as it's all a bit pointless as people will never see eye-to-eye and I doubt any of us really know what we're talking about - whether we're actually trading these spreads or not.

Also here's the spread for the year each of those coloured bands represent 1 sigma with mean coming out a .25odd

 

[barjon]

😆 yes, but you were able to demonstrate the disaster risk he was running. Can you with this? I'd be pleased to hear it if you can because I can't.

Oh and I might add that the only disaster that I averted by the skin off my teeth was when I entered long/long by mistake instead of long/short just before the market turned round and plunged.

So the only disaster risk I can think of is me 🙂

 

[scose-no-doubt]

If someone can provide me with donkeys years worth of dow and ftse for a bit of an analysis to see whether there is any risk of decoupling or correlation risk as DT called it.

 

[ChocolateDigestive]

Right now that c0cks have been put away I'd like to point out that I have regressed the year-to-date spread ratio against the usd/gbp exchange rate and the fellation coefficient comes out at 0.272574292 suggesting very weak relationship i.e. not much currency risk - this year. At least not in the way DT seems to think it works. I don't have fancy data packs but if someone wants to give me a sh8 load of data I'll analyse it all to keep proving that everything I've said was right all along 🙂 that basically, you're trading liquidity re: the aggregate economic exposure of UK vs US index constituents or possibly supply/demand pricing imbalances as money flows into one rather than the other.

I suggest that the thread would be a lot better if people put up theory supported by numbers rather than just tongue flapping as it's all a bit pointless as people will never see eye-to-eye and I doubt any of us really know what we're talking about - whether we're actually trading these spreads or not.

Also here's the spread for the year each of those coloured bands represent 1 sigma with mean coming out a .25odd

10/10 for effort mate but correct me if i am wrong Barjon is trading the residual not the ratio. i.e. the difference. apart from that I like it 🙂 both ratio / residual are valid methods just I think Barjon is trading the residual.

 

[DionysusToast]

😆 yes, but you were able to demonstrate the disaster risk he was running. Can you with this? I'd be pleased to hear it if you can because I can't.

OK - your assertation is this.

DOW & FTSE are correlated. This correlation will remain in all circumstances. Despite the two instruments being in different currencies, there is no risk of the correlation breaking down for long enough for my account to suffer a major loss or margin call.

The similarity between your strategy, Howards strategy and Spanish89 strategy is that they all promise security and absolve you from thinking out any particular trade.

You are absolved from all stress or worry about your trades. You are making money stress free. But is that because you have no risk of ruin or because you don't understand the risk of ruin?

Now - I am not saying the DOW & FTSE are not part of institutional stat arb trades. In fact, such things more than likely exist (hence the correlation) but there is almost certainly a forex component of the arb trade.

As I mentioned above, stat arbs are not 'always on'. In the case of stocks, it's often stock vs stock, stock vs industy, stock vs sector etc. In these cases, there is always risk of the correlation breaking down because of 'black swan' events - such as analyst upgrade/downgrades, buyouts or CEOs fingers in pies. These are unknown risks. Known risks are planned events such as earnings announcements and con calls.

In your strategy there is no mitigation for unknown risks and you haven't really looked very hard into known risks.

Now - you have 'challenged me' to don't demonstrate the risk, based on your prior replies, you will say "the pairs mitigate the risk". Thus, you will continue to be absolved of further research because I have not proved beyond doubt that this is unsafe.

 

[scose-no-doubt]

@ Choccy - Yes that's fine and the the spread related volatility is what Blojob wants but what I'm assessing and trying to get a handle on is the blowout risk which I think is quite low. Lower probably than a single stock /index spread as thats micro and company specific whereas here you're working macro and aggregated over lots of constituents which diversifies you as well as leaving you with a counter position where you're hedged against economic shock.

 

[barjon]

If someone can provide me with donkeys years worth of dow and ftse for a bit of an analysis to see whether there is any risk of decoupling or correlation risk as DT called it.

scose

Best I can come up with is this over the last 40 years. You'll see the relationship has been flat for the last 10 years jumping up and down across a "mean"

 

[DionysusToast]

I suggest that the thread would be a lot better if people put up theory supported by numbers rather than just tongue flapping as it's all a bit pointless as people will never see eye-to-eye and I doubt any of us really know what we're talking about - whether we're actually trading these spreads or not.

Well - this is a debate, right, a discussion?

We didn't need to crunch numbers for Howie or Spanish to understand the outcome.

Still - we do have Jons own words:

I've been running this over three years and the only trouble I got into was in the early days when there was a major one-way realignment (the HC or Spanish type event 😆) which hurt a lot, although it did eventually come back with me out of it and nursing my wounds. I cover that by taking loss at monetary levels now.
.

I can provide data for crunching, let me know the format if you need more.

Do you need forex data too?

 

[DionysusToast]

If someone can provide me with donkeys years worth of dow and ftse for a bit of an analysis to see whether there is any risk of decoupling or correlation risk as DT called it.

How long is a donkey?

 

[scose-no-doubt]

Well - this is a debate, right, a discussion?

We didn't need to crunch numbers for Howie or Spanish to understand the outcome.

Fair enough but isn't it better to evidence your point rather than going round in circles. This is why a lot of threads go nowhere imo. Not attacking or singling you out or anything btw it's just that I'm interested in this and would like to see it go somewhere.

Plus Howard's strategy was unsound on a basic theoretical level, he was selling gamma and theta, here we're still attempting to identify what you're being compensated for. 🙂

Spanish was largely before is before my time.

Gimme anything and everything in Excel CSV or whatever. I don't have the time to do it now but I'll get around to it.

If anyone would like me to analyse anything gimme a request and I'll have a go over the weekend or whatever.

 

[DionysusToast]

scose

Best I can come up with is this over the last 40 years. You'll see the relationship has been flat for the last 10 years jumping up and down across a "mean"

How would that graph look if you took plotted the value of the two instruments in Gold as opposed to points?

Or both in dollars?

Or is it irrelevant seeing as you are SBing them in sterling and just betting on points and not actual value?

It's quite possible you have something that works on SB but not on the actual futures markets, leaving a 'hole' in the hedging abilities of the SB companies. In that case - don't tell them - gather ten million & sink the *******s!

 

[scose-no-doubt]

scose

Best I can come up with is this over the last 40 years. You'll see the relationship has been flat for the last 10 years jumping up and down across a "mean"

wtf is that?

 

[Shakone]

Barjon, nice thread.

What's the biggest loss you're prepared to take, for instance if indices gapped different ways over the weekend?

How sensitive to the 2 value is the method? You mentioned that Dow is approx double the FTSE. If this were to gradually change to 2.2, then 2.5 and more over a period of time, would this be a risk to the method? Do you periodically change this number?

Have you considered the possibility of one market being temporarily suspended while the other is not?

 

[barjon]

OK - your assertation is this.

DOW & FTSE are correlated. This correlation will remain in all circumstances. Despite the two instruments being in different currencies, there is no risk of the correlation breaking down for long enough for my account to suffer a major loss or margin call.

The similarity between your strategy, Howards strategy and Spanish89 strategy is that they all promise security and absolve you from thinking out any particular trade.

You are absolved from all stress or worry about your trades. You are making money stress free. But is that because you have no risk of ruin or because you don't understand the risk of ruin?

Now - I am not saying the DOW & FTSE are not part of institutional stat arb trades. In fact, such things more than likely exist (hence the correlation) but there is almost certainly a forex component of the arb trade.

As I mentioned above, stat arbs are not 'always on'. In the case of stocks, it's often stock vs stock, stock vs industy, stock vs sector etc. In these cases, there is always risk of the correlation breaking down because of 'black swan' events - such as analyst upgrade/downgrades, buyouts or CEOs fingers in pies. These are unknown risks. Known risks are planned events such as earnings announcements and con calls.

In your strategy there is no mitigation for unknown risks and you haven't really looked very hard into known risks.

Now - you have 'challenged me' to don't demonstrate the risk, based on your prior replies, you will say "the pairs mitigate the risk". Thus, you will continue to be absolved of further research because I have not proved beyond doubt that this is unsafe.

toastie

I see where you're coming from but I take issue on a few things.

This correlation will remain in all circumstances. Not quite, I say the correlation will not break down disastrously overnight without the opportunities for me to escape.

You are absolved from all stress or worry about your trades. I am not absolved from that. I have to decide where to enter and decide what loss I take if it goes against - stress and worry all the time 🙂.

In your strategy there is no mitigation for unknown risks and you haven't really looked very hard into known risks. From a directional perspective the fact that I am long one and short the other mitigates the risk of market collapse or vice versa.

The only disaster risk as far as I can see is a sudden (overnight) irretrievable and massive breakdown in the correlation which hasn't happened in the forty years of the chart posted in reply to scose above. I suppose it could but I can't think how.

For the rest, the risk is containable and up to me and my discipline to take losses.

Now - you have 'challenged me' I haven't meant to challenge you, I'm merely interested to learn what disaster risk you see that I can't.

 

[DionysusToast]

Oh and I might add that the only disaster that I averted by the skin off my teeth was when I entered long/long by mistake instead of long/short just before the market turned round and plunged.

So the only disaster risk I can think of is me 🙂

So the one in your OP where "it did eventually come back with me out of it and nursing my wounds" doesn't count as a disaster averted?

Anyway - here's some hourly data, for some reason that's all I can call up right now (Kinetick) - but might be able to get more with the DTN.IQ account another time. I'm still waiting for a setup right now, so can't reconnect...

Jon - what was the period of the bad trade you had near the start - that will help as a reference point, if our crunching doesn't show that - something is off...

 

[barjon]

Barjon, nice thread.

What's the biggest loss you're prepared to take, for instance if indices gapped different ways over the weekend?

How sensitive to the 2 value is the method? You mentioned that Dow is approx double the FTSE. If this were to gradually change to 2.2, then 2.5 and more over a period of time, would this be a risk to the method? Do you periodically change this number?

Have you considered the possibility of one market being temporarily suspended while the other is not?

Bit difficult 🙂 the loss depends on what I might expect from the current "difference" volatility. Beyond that and I'll take it whatever but, of course, I'm then waiting for the opportunity to go again because we'd have moved to a new "extreme". I wouldn't take it blind, though, rather wait for some indication of reversion starting.

On the second I am, in effect, trading a change in the ratio whatever it is at the start so that doesn't matter too much. The last couple of columns in the excel thing are the ratio for the day and a rolling average, but I don't bother with them for this.

Ah that's a risk I hadn't thought of 🙁

 

[ChocolateDigestive]

OK - your assertation is this.

DOW & FTSE are correlated. This correlation will remain in all circumstances. Despite the two instruments being in different currencies, there is no risk of the correlation breaking down for long enough for my account to suffer a major loss or margin call.

The similarity between your strategy, Howards strategy and Spanish89 strategy is that they all promise security and absolve you from thinking out any particular trade.

You are absolved from all stress or worry about your trades. You are making money stress free. But is that because you have no risk of ruin or because you don't understand the risk of ruin?

Now - I am not saying the DOW & FTSE are not part of institutional stat arb trades. In fact, such things more than likely exist (hence the correlation) but there is almost certainly a forex component of the arb trade.

As I mentioned above, stat arbs are not 'always on'. In the case of stocks, it's often stock vs stock, stock vs industy, stock vs sector etc. In these cases, there is always risk of the correlation breaking down because of 'black swan' events - such as analyst upgrade/downgrades, buyouts or CEOs fingers in pies. These are unknown risks. Known risks are planned events such as earnings announcements and con calls.

In your strategy there is no mitigation for unknown risks and you haven't really looked very hard into known risks.

Now - you have 'challenged me' to don't demonstrate the risk, based on your prior replies, you will say "the pairs mitigate the risk". Thus, you will continue to be absolved of further research because I have not proved beyond doubt that this is unsafe.

when I read Barjob's original post I read into it differently to the above Toasty.

'your assertation is this. DOW & FTSE are correlated. This correlation will remain in all circumstances. '

Barjon is clearly relying on the DOW & FTSE being correlated sure. I don't think he ever asserted that the correlation would remain in all circumstances. He actually mentions stops so clearly he has a plan to get out if the trade goes too far against him.



'The similarity between your strategy, Howards strategy and Spanish89 strategy is that they all promise security and absolve you from thinking out any particular trade.'

there is no similarity of promised security, nowhere has Barjon promised security

'You are absolved from all stress or worry about your trades. You are making money stress free. But is that because you have no risk of ruin or because you don't understand the risk of ruin?'

mate this is naughty. He hasn't stated this or asserted it at all. naughty because that question on risk or ruin is patronising to Barjon, that's how I read it. I dont know Barjon but I am sure he has some grasp of money management issues.

'Now - I am not saying the DOW & FTSE are not part of institutional stat arb trades. In fact, such things more than likely exist (hence the correlation) but there is almost certainly a forex component of the arb trade.'

this is not an arb trade, best just to call it a spread trade. There is no ARB trade between the Dow and FTSE. Of course forex will play a part in the price action of this spread.

'In your strategy there is no mitigation for unknown risks and you haven't really looked very hard into known risks. '

Barjon talks about stops in his OP so he must have some risk management in place so he must be managing risk, how do you know he hasn't looked very hard into known risks? is that an assumption?

'Now - you have 'challenged me' to don't demonstrate the risk, based on your prior replies, you will say "the pairs mitigate the risk". Thus, you will continue to be absolved of further research because I have not proved beyond doubt that this is unsafe'

I am sure Barjon has just phrased this incorrectly he must know the risk isn't mitigated but the risk is clearly lower on a well correlated / cointegrated spread than trading a single instrument.

I raise these points as I read Barjon's OP in a totally different way. Certainly many biases come out during reading, trading whatever activity you care to pick.

 

[DionysusToast]

Not quite, I say the correlation will not break down disastrously overnight without the opportunities for me to escape.

Based on the fact that it hasn't happened in your analysis period, right? So if it didn't happen before when you were away from the screen, it cannot happen again?

This is not rational. You presume that everything that can happen already has happened.

I am not absolved from that. I have to decide where to enter and decide what loss I take if it goes against - stress and worry all the time 🙂.

So you worry about it but leave trades open and go to bed? You close trades that go against when you are awake but sleep soundly that it won't happen when you are asleep?

The only disaster risk as far as I can see is a sudden (overnight) irretrievable and massive breakdown in the correlation which hasn't happened in the forty years of the chart posted in reply to scose above. I suppose it could but I can't think how.

Correct - but you have 2 things to consider.

- You have not factored currency into any of your analysis. In a currency event, is your SB going to maintain your bets in sterling when their actual dollar value is changing dramatically? Is your SB company going to take a huge currency loss to honour the S&P side of your trade? What does the contract say?

- The UK stock market and the US stock can do something that they haven't done before. In fact, whilst you say nothing bad happened in 40 years, it is clear that something bad happened almost 3 years ago that cause you a lot of grief. You maintain that this can only happen when you are at the screen.

I still maintain that you may well be looking at an unclosed loophole in the way SBs take bets. You are not trading underlying values but betting on number of points moved on each instrument. Hence my interest in seeing numbers crunched where the currency difference is taken out of the equation.