In Rob Carver’s Advanced Futures Trading Strategies (Amazon,) there’s a chapter, “Strategy Nine: Multiple Trend Following Rules,” that uses composite trend-following rules to drive a long-short strategy. We explore the strategy through an Indian market participant’s lens.
There are a number of decision points to navigate. Primarily, long-only vs. long-short, binary vs. scaled and equal-weight vs. cost-screen. Some of these are not practical for retail futures traders. For example, you could use the different SMA rules to scale in and out of positions instead of taking a binary approach. However, that implies that each position will need at least a dozen contracts – a capital requirement that is out of reach of a typical retail trader. Another problem is that the Indian market is notoriously expensive to trade. The cost-screen used by Carver throws out a lot of short-term SMAs, making the strategy unresponsive to short-term market moves.
Summarizing NIFTY 50, NIFTY BANK, NIFTY MIDCAP and SMALLCAP indices through Strategy 9:
NIFTY 50 and NIFTY BANK are poor candidates for this system – consistently under-performing buy & hold. The SMALLCAP index doesn’t have futures listed on it – forcing a realistic implementation to be long-only. The MIDCAP index does have futures on it, making long-short possible. The cost-screen version can be safely ignored.
If we decide to use futures for MIDCAP, we need to make sure we don’t blow up because of leverage. The problem with the long-short strategy is the periodic 20% drawdowns. Even at 2x leverage, that’s a capital impairment of over 40%.
However, looking at the equity curve, it may be worth the extra antacid budget?
The next question is, scaled vs. binary?
The scaled long-short version (red line in the chart above) is objectively worse than binary long-short (green line).
So, the version that worked for MIDCAPs is a binary long-short without cost-screen.
For SMALLCAP, given that it doesn’t have listed futures, we’ll have to settle for the binary long-only version without cost-screen.
We interrogated Claude as to the robustness of Carver’s approach. You can read the back-and-forth here.
Code and charts on github.