The Golden Problem: Why It is Difficult to Come Up With a Good Trading System for Spot Gold and Some of My Findings

Post Time:2015-05-08 Views:

The Golden Problem: Why It is Difficult to Come Up With a Good Trading System for Spot Gold and Some of My Findings
Gold is definitely something most of us want to trade, not only because it is a significantly liquid asset but because it is offered by many different Forex brokers and provides a solid alternative asset class against currencies. If you have a system for spot metals that can also trade spot currencies then you’re most probably after a solid market inefficiency and even if you have separate systems for spot currencies and gold the degree of diversification you gain by investing in gold might increase the future chances of survival of your strategy basket. However creating a system for gold is not very easy since the market conditions that determine gold price have fluctuated significantly during the past twenty years and some of the assumptions made for currency trading simply do not apply to gold.
When developing systems for spot currencies I usually do a development process based on 10-20 years of data which in the end reveals a strategy that is able to profit across a wide variety of market conditions. In currencies the assumption that a strategy that gives 10 years of profit will continue to profit is valid for the most part as systems that have been developed over the 1990-2000 period and then out-of-sample tested from 2000 to 2010 give profitable results overall. This means that the market structure around currencies seems to have some sort of coherence which has not disappeared within the past 20 years and which has a high probability of growing even stronger into the future. For me it is therefore not hard to develop a system for spot currencies as I have a high degree of confidence in the like-hood of success of the development process.
Now silver and gold are a completely different story. If you develop a system using EOD data for Gold between 1994 and 2000 (which is what we have available) you’ll find that these systems always fail in the 2000-2011 period, simply because gold has “changed gears” and entered an exponential growth phase during the past ten years which is very unlike anything seen within the 1980-2000 period. When developing systems with even the slightest degrees of freedom it becomes evident that any curve fitting to the gold 1994-2000 era yields unprofitable results under a later out-of-sample testing time. It is therefore evident that any strategy developed from the 2000-2010 period will most likely suffer the same fate. Gold has increased almost 8 times in value since 1998 and this growth phase seems to be simply unsustainable in the longer term so gold will most likely either arrive at a “still phase” (much slower ascent or decline) or crash hard during the next 10 years (check data from 1960-1980 to see a similar scenario happening). the important thing is that we simply cannot assume that exponential growth will continue, we must build systems that may profit if it does or if it does not.
Does this mean that we cannot develop a gold system? No, it certainly doesn’t mean that but it means that we need to develop systems for gold that take into account everything that has happened within the past 17 years (from 1994) so that we do not simply crash and burn if there is in fact a change in gold’s trading tendency. We want to be within a scenario where we can profit from both a steady continued ascent (further valuation of gold) or a change in gold’s trading (crash or change to “stand still”). I could not comfortably develop a system based only the past 10 years of exponential growth because all systems are heavily asymmetric (rely almost entirely on longs to profit) and fail under previous conditions (which we will eventually see again as the economy cycles).
Another interesting part comes when we attempt to develop trading systems for the past 17 years. Using our Asirikuy genetic framework (Coatl) there are almost no positive results and those that do show up have a very limited number of trades. Coatl is indeed quite confused by the hard change in trading character and despite its very large decision space it is unable to find a meaningful fit that can achieve significant profit on this asset’s charts for the past 17 years. It seems that the change in market conditions was nothing but abrupt and therefore genetics do not achieve success as the “grip” they attempt to put around gold is just “too tight” to put it in words.
What can we do to build a successful trading system for gold ? Well we can always think of gold a as as regular commodity and attack it with a symmetric trend following strategy that makes no assumptions and has no optimizations (Quimichi) and see what happens. Not surprisingly Quimichi is one of the few Asirikuy strategies that does manage to reach a profitable outcome on gold’s 17 year data without any optimization and with the exact same settings used on other currency pairs. This shows – yet again – Quimichi’s power as it is able to profit from things as varied as the USD/JPY and the spot gold XAU/USD pair. Sure, results aren’t very good (average compounded yearly profit to maximum draw down ratio of 0.2) but overall results are positive which is the first step into the building of a really robust gold system (which will resist even a “hard crash” in gold).
Certainly I will continue to explore this area with some similar trend following techniques and some additional genetic modifications and hopefully I will be able to find some robust implementations to trade metals within Asirikuy which can help us compliment our currently currency-only trading portfolios. If you would like to learn more about automated trading and how you too can perform long term evaluations using EOD data please consider joining, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach towards automated trading in general . I hope you enjoyed this article ! :o)

Customer Service

Hong Kong:(852)30501724      Vietnam:(84)0444583209
New Zealand:(64)48303353      China:(86)4006091288