XJO Trading System

[volatility]

Hi All,

So I thought I'd join in the conversation around trading systems as this has been something I have been interested in over the last 13 or 14 years.

I've built a few over the years that I have used on and off, but, generally, I was never 100% committed to them as I used to spend 10 hours + in front of the screen a day and really was a much more reactive trader (e.g. news, depth, short-term technicals).

Over the years I have become a lot busier doing other things that interest me (such as starting up TradeFloor) and have had significantly less time to trade, which really pushed me to go back to what I feel most comfortable in - swing trading - holding trades for a few days / weeks using signals that appear on a daily basis.

I co-founded TradeFloor at the end of 2014 and at about the same time we started collecting all options data available in Australia (all ~50k prices deemed every hour) in the hopes of back-testing some strategies and at some stage allowing every retail trader to do the same.

In my personal trading I have always preferred derivatives to equities and especially indices - mostly traded SPI, minis and DAX futures. This trading system is going to be a simple modified version of what I've learned in the past 15 years from my roles in trading & risk management. I will be using options to do this.

Why options?

I got hooked on options about 6 years ago. I had a risk management SME role within a leading IT firm, where I needed to understand options down to the finest detail as I was required to build a super accurate margin estimator that was super fast. Until this point, I traded options, but nothing more than a few calls and puts "here and there" on some commodities. In this role, I had the opportunity to extend my knowledge to new levels and, now that I believe I understand every intricacy of the ASX ETO market, I know I have the edge in this space.

If you want to learn more about options I run a heap of webinars. Just PM me or ask on here and I'll send you a link to a recording or the next event I'm running.

The rules

Ok, enough stories. Let's look at the rules.

Timeframe: 1D as I don't want to spend lots of time in front of the screen.
Instruments: Something with low volatility that tends to range-trade. I've picked XJO for this as it's easy for me to back-test
Trading Strategies: Bear Call spreads and Bull Put spreads, however they will turn into long call & long put trades as the market moves around.

The philosophy behind the trade is simple. If the market is trending higher, I assume the trend will continue but will snap back aggressively and revert to the mean.

Bullish Signal
Simple Moving Averages (SMA) - picked due to the simplicity of getting them in every charting package.

30 day SMA > 200 SMA
Share price is above the 30 SMA
30 SMA is trending upwards
Share Price is above the recent high

If Bullish I trade a Bull Put Spread with the following strikes:

B XJO 20-50days expiry ATM Put*
S XJO 20-50days expiry ITM Put (ITM strike calculated as 1/2 Std Deviation)

*whatever the closest monthly expiry is

ITM calculation is Current XJO Forward Price + (Current XJO Forward Price X (implied volatility / 2) X SQRT (days to expiry/365) )

Usually, this is about 100-150 points

Bearish Signal
30 day SMA < 200 SMA
Share price is below the 30 SMA
30 SMA is trending downwards
Share Price is below the recent low

S XJO 20-50days expiry ITM Call (ITM strike calculated as above)
B XJO 20-50days expiry ATM Call*

Adjusting Trade
If any of the original trade conditions are not met, you buy back the sold position, leaving you with a long call or long put position. If you receive two lower lows or two lower highs in the direction opposite to your trade you do the same.

If the market reverses again after you buy back your sold position, you sell the ITM option again.

If you are correct and the price goes higher (or lower if you are bearish) than the ITM strike by 1.5%, you roll higher (or lower).

Backtesting results
Assuming 10k starting balance July 2016 and ending Feb 2018 when the last bearish signal occurred, risking 20% max on your first few trades and didn't scale your lot size, the return was 272%.

If you compounded your returns and risked 20% every trade your return would have been 499%.

Next steps
If you want to follow these trades in a paper-trading account, you can setup a free account in the ASX/TF options trading game, which starts on the 1st of May.

Obviously, past performance is not indicative of future results. What I'll be doing, however, is setting up an account and trading this myself. I honestly have no idea how it will work out, but let's hope for the best .

 

[brty]

"Option as a Strategic Investment," by Lawrence McMillan

I think you need to read the above book.
Your strategy for making money on Australian ETOs just will not work because of slippage, and brokerage.
I wonder if you used selling at the bid and buying at the ask in your researched results, then applied the brokerage charged for a $10k account. I'll hazard a guess you did not.
I first traded ETOs on the Australian market 28 years ago (on individual stocks), so please don't quote your 'experience' in replying.

If you really think you have something, put up some live trades over the next couple of months from scratch, don't quote some theoretical past performance.

I have a very low tolerance for 'advertising' of trading prowess with some theoretical numbers.

The MM does not always have to offer quotes, and the spreads can be large. for those interested in trading ETOs should have a good study of the following...
https://www.asx.com.au/documents/products/asx_eto_market_making_scheme.pdf

 

[volatility]

Thanks Brty.

That's a great book and I can quote a few others too.

Your strategy for making money on Australian ETOs just will not work because of slippage, and brokerage.
I wonder if you used selling at the bid and buying at the ask in your researched results, then applied the brokerage charged for a $10k account. I'll hazard a guess you did not.

I used the theoretical price + 2 ticks and included brokerage charged at $25 a leg. Where I am trading a 5 tick spread is about as large as the market gets - so effectively I am buying the offer, or one tick below.

If you really think you have something, put up some live trades over the next couple of months from scratch, don't quote some theoretical past performance.

Exactly what I intend on doing. Thus my last line
"What I'll be doing, however, is setting up an account and trading this myself. I honestly have no idea how it will work out, but let's hope for the best"

I have a very low tolerance for 'advertising' of trading prowess with some theoretical numbers.

I don't advertise trading prowess and couldn't care less if you read or don't read this / follow or don't follow this as a system. My understanding is that is what this space is for.

The MM does not always have to offer quotes, and the spreads can be large. for those interested in trading ETOs should have a good study of the following...
https://www.asx.com.au/documents/products/asx_eto_market_making_scheme.pdf

100% correct and they are great for understanding liquidity in an individual asset. FYI - in our platform, we display these as the ETR - Extreme or Estimated Trading Range. When trades occur outside of these ranges they actually need to get busted by the exchange (we have some tools around this). MM are obligated to quote to these levels if they quote. You are correct, there are situations when they don't have to quote (e.g. fast moving market as was the case when Trump won) but they have strict minimums that they have to adhere to or they get penalised with higher rates.

 

[volatility]

OK - been a bit busy doing other stuff and the market was all sorts of weird.

First trade up today



Bull Put Spread at -56 ...

B 6025
S 6125

Will buy back 6125 put if we break below the red 30d MA.

 

[fiftyeight]

Will you be explaining the rationale of each trade? Or is strictly the rules posted above?

 

[volatility]

Will you be explaining the rationale of each trade? Or is strictly the rules posted above?

The goal is to stick to the rules as much as humanly possible - only deviations would be if I miss an exit or entry in the market due to not monitoring the market. My view on this is this if we (anyone collectively here on ASF) finds an options/equities system that works and can be automated, we can turn it into a self-trading system, with auto-entry/exit based on these rules.

At the moment, we're working on building a tool for back-testing options strategies, which should be built in a month or so. We have a heap of hourly data for every option on the ASX (~50k at any given point!!) going back to start of 2015. We will see how the next few weeks go, and if anyone would like access to this PM me.

If it all fails then we're back to discretionary trading and my hypothesis failed haha

 

[volatility]

Closed the trade out today

B 6125 put @ 15 pts as the market hit 6125 and we're 2 days from expiry.

My bought put remains open as it's practically worthless - not worth the brokerage to close.

Will wait until after expiry and see where the market is. Will probably wait for a break of highs to get back in to a bull put spread.

 

[volatility]

I actually ended up getting a magical fill on my sold put at 3 pts!!

As the market is clearly going to close higher than 6150 and we are going to get a clean break, I've entered a new Bull Put spread @ -54

S 1 6250 Jul Put
B 1 6150 Jul Put