In this article we will explore the Eurodollar (EC) future through the development of a trading strategy. This underlying, belonging to the category of currency futures, is listed on the CME in Chicago with a session that begins at 17:00 and ends at 16:00 (Exchange time).
Typically, on instruments belonging to this category, the advantages are less pronounced, making it more difficult to obtain good performance through systems. However, it is important to consider that each strategy is developed with the intention of being integrated into a well-diversified portfolio. This approach allows balancing the drawdowns of individual strategies, achieving good stability of the portfolio as a whole.
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Using Bollinger Bands in Trading Systems
Before proceeding with the development, let’s analyze the indicator on which the strategy will be based, namely the Bollinger Bands. This technical analysis tool, created by John Bollinger, is composed of three lines:
– The simple moving average, calculated on the closing price.
– The lower band, calculated by subtracting the standard deviation of the price from the moving average.
– The upper band, calculated by adding the standard deviation of the price to the moving average.
To calculate the moving average, a value of 20 is usually set, thus taking into consideration the last 20 bars, while for the standard deviation, a multiplier of 2 is set. This indicator can be used in different ways, the two main ones being following a trend following or mean reverting logic. In the first case, you will buy when the price exceeds the upper band and you will sell when the price exceeds the lower band. In the second, however, the positions will be opened in a diametrically opposite way, buying when the lower band is exceeded and selling when the upper band is exceeded, since in proximity to these levels a return towards the mean is expected.
Figure 1. Graphical representation of Bollinger Bands.
Logic of the Eurodollar Strategy with Bollinger Bands
At this point we proceed with the development of the strategy on a 60-minute time frame. We will use the Bollinger Bands following the mean reverting logic. However, we will not enter a position immediately after the price exits outside the bands, but we will wait for a re-entry within them. In other words, we will buy if the price is below the lower band and the 60-minute bar closes above it and we will sell if the price is above the upper band and the bar closes below it. Furthermore, by doing so the positions will be inverted when the signal occurs, going from long to short and vice versa.
Finally, we also add a stop loss and a take profit to this strategy, both of 3000 dollars, with the aim of eliminating any outliers (anomalous values) from the backtest.
Analysis of the results of the raw strategy from 2010 to today
The results of the strategy, analyzed from 2010 to today, have proven promising. Looking at the equity line in figure 2, we can see a fairly regular trend considering the simplicity of the strategy, which reaches a net profit of about $85,000.
However, analyzing the Total Trade Analysis, the first critical issues emerge. More specifically, taking a look at the average trade shown in figure 3, we notice a value of 35 dollars, which is not enough to support operating costs. Furthermore, this metric, if analyzed separately between short and long, shows a significantly lower value on the latter side. This is certainly due, in part, to the bearish trend of this underlying, shown in figure 4. This trend, therefore, does not seem to have favored the long side of the strategy, but we must consider that we are approaching a future belonging to the category of currencies, which do not form generally predictable trends in the long term such as stock markets, which tend to rise. Consequently, it is good practice to develop on both sides (both long and short) and not limit yourself only to the best performing.
Figure 2. Equity line of the mean reverting strategy with Bollinger bands on the Eurodollar future.
Figure 3. Total Trade Analysis of the mean reverting strategy with Bollinger Bands on the Eurodollar futures.
Figure 4. Downtrend of Eurodollar futures from 2010 to today.
Refining the Eurodollar Mean Reverting Strategy
Faced with these results, we propose to add an operational filter to the system to improve its performance, paying particular attention to the average trade. We proceed by inserting a time window, limiting the operation to a specific band of the session. In other words, we will see if better results are obtained by operating only during this band, and no longer during the entire session.
Looking at the optimization results in figure 5, we note that starting to operate after 19:00 (exchange time) the strategy reaches a net profit of 120,000 dollars with an average trade of 55 dollars. As for the end of the operating time window, we note from figure 6 that choosing 7:00 as the time, excellent results are obtained in this case too, both in terms of net profit and average trade, but also considering the maximum drawdown.
Figure 5. Optimizing the start time of the operating time window.
Figure 6. Optimizing the end time of the operational time window.
Strategy results after adding the operational filter
Taking a look at the performance of the strategy with the operational filter, we first notice, in figure 7, a clear improvement of the equity line, more regular and with less marked drawdowns. The strategy also reaches a net profit of 138,000 dollars and an average trade of over 160 dollars, 4 times higher than the value obtained at the beginning of the development. With these metrics the strategy is certainly ready for live trading. Furthermore, with this operational filter even the average trade on the long side, if considered individually, would be sufficient to cover the operating costs, despite the bearish trend of the future seen previously.
Figure 7. Equity line of the mean reverting strategy on the Eurodollar after adding the operational filter.
Figure 8. Performance Report of the mean reverting strategy on the Eurodollar after adding the operational filter.
Figure 9. Total Trade Analysis of the mean reverting strategy on the Eurodollar after adding the operational filter.
Final considerations on the mean reverting strategy with Bollinger bands on the Eurodollar
In this article we have illustrated how it is possible to develop trading strategies even on underlying assets that are generally more difficult than others, such as in this case currency futures. However, it must be considered that the system could be further refined, for example by looking for optimal values for the stop loss and take profit, which we have not dwelt on.
But with the metrics shown above this strategy would already be ready for live trading, inserting it, as always, within a well diversified portfolio.
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Happy trading,
Andrea Unger