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Finding Alphas: A Quantitative Approach to Building Trading Strategies by Igor Tulchinsky

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24 Introduction to Futures Trading

By Rohit Agarwal

Futures trading includes equity indices, commodities, currencies, and bonds.

An alpha is proportional to: (breadth of universe * depth of information). There are certainly a lot fewer instruments in the futures universe as compared to the equity universe – which means we need to do greater in-depth research to generate substantial alphas from them.

With futures, in contrast to equities, one property may not be comparable across the entire universe due to the diversity within the universe. This difficulty in generating alphas is compensated by the greater liquidity in these markets.

Here’s a look at the most interesting, prominent, and useful information or phenomenon monitored in futures trading.

COMMITMENT OF TRADERS REPORT BY THE COMMODITY FUTURES TRADING COMMISSION

The Commitment of Traders (COT) report (Figure 24.1) is released every Friday. It can be extremely valuable in knowing what the “smart money” is betting on, and then following it. The report gives us the open interest breakdown by different market participants, such as commercial traders (big businesses/producers), non-commercial traders (large speculators), and non-reportable traders (small speculators).

Image described by caption.

Figure 24.1 COT report of wheat for the week ending January 2014

Source: U.S. Commodity Futures Trading Association (Jan, 2014)

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