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Forex Trading Strategies and Backtesting Techniques using Quantra Blueshift - Presentation

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In this joint webinar by FXCM & QuantInsti®, you’ll get to learn about the FX market data, trading strategies, backtesting & optimization techniques along with new nextgen tools & platforms.

SESSION OUTLINE:
- Spot Currency Markets Overview
- Related Markets, Macro Drivers (Funding - Repo+xccy Swaps, Forwards and Short term IR)
- Accessing FX Data & Overview of Strategies
- Optimizing & Backtesting
- FX Styles: Carry, Momentum, Value and Defensive
Alpha Strategies


Useful Links:

Quantra: https://quantra.quantinsti.com/

Quantra Blueshift: https://quantra-blueshift.quantinsti.com/

Momentum Trading in Forex: https://quantra.quantinsti.com/course/momentum-trading-forex

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Forex Trading Strategies and Backtesting Techniques using Quantra Blueshift - Presentation

  1. 1. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Getting Started with FX Introduction to Quantra Blueshift Platform Font: Calibri (headings) Size: 44 Color: White Font: Calibri (Body) Size: 20 Color: Green (R:148, G:201, B:81)
  2. 2. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. What is Blueshift Heading Font: Calibri (Headings) Size: 36 Color: White Systematic Trading Strategies – For Everyone! IP protection Financial datasets On the cloud Back-testing Strategy research Learning and community
  3. 3. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Foreign Exchange Market A very brief overview “Successful investing is anticipating the anticipations of others.” John Maynard Keynes (Economist)
  4. 4. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. FX Market Overview 1. Source: BIS Triennial Central Bank Survey 2016 2. BIS quarterly review One of the largest, most liquid, decentralized global financial markets. Daily volume $5.0T, daily retail volume $280B (74% of non- financial volumes)1. Spot FX market is tightly linked to 1) GC repo/ OIS market for liquidity 2) STIR markets (Eurodollar/ Euriobor, Short Sterling etc.) for directionality and 3) Forward and Cross currency swaps market for longer term dynamics. Highly automated (70%2) – One of the first markets to introduce automated trading! major differences with equity market: 1) higher leverage 2) easier shorting (and no short squeeze) 3) very different volatility 4) More efficient is probably a myth.
  5. 5. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. What Drives the FX Markets Balance of Payments: Improved balance strengthens the currency. Rates and Inflation: Rate hikes by the central bank or its expectation build-up strengthens the currency in the short term. Economic Growth: A strong economy will drive the currency higher as it attracts foreign investments. Fiscal Policy: can impact exchange rate either way (depending on factors like the government financing positions, economy etc.). Corporate Flows: Flows driven by business (non-macro) can be sizable to impact the exchange rate in the short term. Bond Issuance + Money Trasfers: Hedging by arranger/ market- makers can impact the exchange rate market. Systematic flows can persist. Spillovers: From other markets can move exchange rate, e.g. strong equity performance in emerging markets my push up the FX. Macro Factors Significant events: Sudden political change, geo-political development or un-pegging of currency by central banks can impact FX markets strongly Money Flow Events
  6. 6. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Reach or Cheap: FX Valuation Purchase Power Parity: Basket of similar goods should cost same everywhere, roughly speaking. Real Effective Exchange Rate: Trade-weighted and inflation adjusted measure of exchange rate, assumed mean-reverting (possibly true after some adjustments) Fundamental Equilibrium Exchange Rate1: REER that equates to a sustainable balance of payments over long-term. Another alternative form (BEER) adjusts for other economic variables. Auto-regressive Forecast Models: Time-series based (ARIMA) models that are primarily empirical from historical data Other Data-driven Models: Non-linear time-series models, Neural Networks (LSTM) and similar. “Cynic: A man who knows the price of everything, and the value of nothing ” - Oscar Wilde 1. Exchange Rates and Economic Fundamentals (link) Econometric Models Data-driven Models
  7. 7. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Systematic Trading in FX The Blueshift Platform “Unfortunately for the case of sanity, that (momentum investing) seems to be true.” Cliff Asness (AQR Capital)
  8. 8. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Forex Data-set on Blueshift 10 currency pairs - AUD/USD, EUR/CHF, EUR/JPY, EUR/USD, GBP/JPY, GBP/USD, NZD/USD, USD/CAD, USD/CHF, USD/JPY. Minute-level data since 2008. Updated once every day from FXCM. This is augmented by Macro data on 8 underlying economies (real GDP, Y- o-Y core inflation rate, short term (3-month) and long term (10-year) interest rates. Currencies modelled as non-funded (leveraged). Leverage, account currency settings and roll-over cost calculation is NOT automatic. Price Data from the `data` argument passed. Two methods available – data.current() and data.history(). Macro data can be imported as python module, and have same functions (with slightly different arguments). How to read data on Blueshift: Example as follows
  9. 9. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Work-Flow on Blueshift initialize() handle_data() before_trading_start() Called once at the start of the algorithm Place to set up algorithm parameters and initialize them Arguments: context – a dictionary object to store all user parameters and variables and available to all other functions Called once at the start of the trading session (i.e. once a day) Place to set up daily pre-open stuff Arguments: context – as above, and data – a object with current date-time, can be queried for current or historical data on symbols Called once at every bar (every minute) Place to set up logic on how to respond to market data Arguments: context – as above, and data – as above schedule_function() date_rules() time_rules() Other Useful API Functions order_percent_target() get_open_orders() cancel_order() set_commission() set_slippage() set_account_currency() Schedule any user- defined functions at a given time and frequency Functions to place, and cancel orders Functions to set trading and other parameters
  10. 10. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Blueshift Environment Data contains everything needed to feed data: current(), history(), as well as current_dt Context contains everything else: Portfolio (context.portfolio), account (context.account), calendar (trading_calendar) See here for more details Context trading_calendar tz(), open_time() etc. account leverage, etc. portfolio positions asset, amount etc.
  11. 11. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Blueshift Workflow Demo 1. Signing up and Platform Tour 2. Creating Strategy 3. Running Back-test with a template 4. Creating our own template 5. Adding imports, initialize() 6. Adding some supporting functions - a) cancel_all_open_orders, b) square_off c) get_positions, d) get_portfolio_details 7. Add the rollover computation - compute_rollovers 8. Define a generic rebalance method 9. A few technical indicators 10. Let’s run and see
  12. 12. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Systematic Trading in FX FX Styles and Alpha Strategies “A rising market and a long position is a sure sign of investment genius” John Kenneth Galbraith (Economist)
  13. 13. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. The Fundamental Beta in FX Value: “cheap” currencies will go up in value, and reverse for “expensive” ones. Measure of richness/ cheapness requires economic or empirical models (like purchase power parity, REER or statistical regression-based etc.) Momentum: Past returns are persistent. Rank currencies on past returns, long the top ones, short the bottom ones(cross- sectional momentum). Alternatively, long if past returns are positive (above threshold) and short if the reverse (time-series momentum) Carry: Positioning to profit if nothing changes in the universe except passage of time. Long currencies with higher yields (interest rates) and funded by ones with low yields. Defensive: Low risk currencies (better sovereign ratings) produces better risk-adjusted returns. Long currencies with higher sovereign ratings and short the bottom ones.
  14. 14. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Creating A Carry Strategy 1. A bit more on the logic 2. Which one we should buy and which ones to sell 3. Coding the strategy – Starting from the template 4. Adding the momentum logic 5. Adjusting the re-balance function 6. Running the back-test
  15. 15. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Creating Other Factor Strategies 1. Pick up from where we left 2. Which one we should buy and which ones to sell 3. Coding the strategy – Starting from the template 4. Running the back-test
  16. 16. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Creating A Factor Basket 1. Pick up from where we left 2. Simple allocation of 1/3 in to each of carry, value and momentum 3. Combining the strategies 4. Running the back-test
  17. 17. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Strategy Development Developing strategies on Blueshift “Past performance is the best predictor of success” Jim Simons (Renaissance Technologies)
  18. 18. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. The Strategy Spectrum
  19. 19. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Systematic Strategy Design Cycle Universe Selection Signal Generation Target Portfolio Rebalance Improve Can be static or dynamic with filtering Can be independent of/ Dependent on the rest Based on signals + positions rules Execution rules/ strategies go here Research and refinement process
  20. 20. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Systematic Strategy Development  Inputs: Input to the strategies can come in many flavours1 like  Price/ returns and it’s transformation. Most of the common technical indicators are transformation of price returns2  Positioning information – volumes and open interest data and participant-wise positioning data if available  Fundamental information –macro-economic information (e.g. interest rates or yield curve slopes)  Non-market information: Example twitter sentiments, analysts ratings of sovereigns etc.  Trading Rules/ Logic: Can be either based on trader’s hypothesis or inferred (learned) from data  Form hypothesis (e.g. moving average cross-over signals change in trends) and test  Feed data to infer rules (e.g. supervised learning of a random forest or other machine learning models)  Back-testing and Forward-testing: A crucial step and often over-looked step.  A good platform to guard against biases : data-mining bias, survivorship bias, market-impact modeling, look-ahead bias  Should be flexible, event-driven (to avoid look-ahead bias) and with built-in analytics  Portfolio Creation/ Optimization - Ensemble Strategies: Never go all-in with a single strategy  Two strategies better than two – if they are uncorrelated (in terms of signals and/ or performance)  Various methods exists – Bagging/ Boosting (voting), Stacking  Various methods of risk capital allocation – e.g. Kelly criterion, equal-weighted, momentum-weighted, many more 1. Ideally sources should be disparate, uncorrelated and relevant. 2. For further technical details see here.
  21. 21. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. A BBands Breakout Strategy 1. A bit more on the logic 2. Coding the strategy – start with the template 3. Checking the code 4. Running the back-test 5. Good look at the results Examples: Some Other Types 1. Another Technical (RSI) 2. Statistical (Correlation based) 3. A Daily Routine 4. Other possibilities – Time-series (ARMA) models, Data-driven (AI/ Machine learning) [ Not in demo] 5. Ensemble Methods – Ensemble in terms of signal generation, ensemble in terms of profit-and-loss. They are equivalent in case the signal aggregation method is ‘average’ and capital allocation is equal [Not in demo]
  22. 22. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Back-testing: Optimize? Scientific way of developing a strategy: The way most of us end up with: optimize evaluate ideate deploy ideate hypothesize evaluate works doesn’t deploy start over Back-tests are useful for hypothesis testing Not a data-fitting tool We do not want to optimize our backtest performance. We want to optimize expected live performance.
  23. 23. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Problems with Optimization Alternative to Optimization 1. Adaptive Strategies: Example Change Point Analysis 2. Stable Factor research: With economic/ behavioural justification 3. Ensemble Strategies: Works best with diverse strategies [not in demo] 4. Validation – cross validation or paper-trading -1.50 -1.00 -0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 0 0.5 1 1.5 2 2.5 3 3.5 4 AdjustedSharpe Measured Sharpe Sharpe Ratio Adjustment 10 test 100 test 1000 test base
  24. 24. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. What It Is Not Black-box: A systematic strategy should NOT be a black-box. We should ALWAYS be able to explain why we buy what we buy (and sell); and why does it make money. Risk-free Profit: No systematic strategy (or any strategy!) is risk free, and will never make money all the time, every time. Risk management is very important. Fire-and-Forget: A systematic strategy is an evolving one. It must pass through the constant cycle of performance measure, tuning and re-risking. Man vs. Machine: Systematic strategies are not about man vs. machine, but man and machine. Human brain is far better evolved to develop hypotheses. Machines are far better at testing and executing them.
  25. 25. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Strategy Development - Recommendations Always save all your strategy variables in the `context` environment - helps tracking variables and re-starts Use schedule_function if your algo does not need to respond to every bars - will run faster Good practice to check account leverage to make sure the algo is running as intended Do not over-fit – build a hypothesis and test. Data-mining (p-hacking) generates good performance in the past and bad going forward Check the stats in the backtest results. A strategy with low Sharpe, concentrated wins (low stability), large downside risks (negative skew), and large drawdowns and high beta are not one you can actually invest in
  26. 26. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. List of Demo Strategies 1. Strategy Template 2. Value Strategy 3. Carry Strategy 4. Time-series momentum strategy 5. Cross-sectional momentum strategy 6. Factors basket strategy 7. Bollinger band based break-out strategy 8. RSI based mean-reversion strategy 9. Correlation based statistical strategy 10. FX daily computation template 11. Change point based regime switching strategy Find them at: https://github.com/QuantInsti/blueshift-demo-strategies
  27. 27. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. Next Steps Are you new to FX trading and want to start from Basic? Enjoy FX trading basics course on Quantra. Enroll for Free! Are you a FX Trader and want to backtest you strategies? Benefit from the Quantra Blueshift early access. Start exploring!
  28. 28. quantra-blueshift.quantinsti.com CONFIDENTIAL. NOT TO BE SHARED OUTSIDE WITHOUT WRITTEN CONSENT. THANK YOU! For further queries reach out to blueshift-support@quantinsti.com

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