Published 2023-12-08

Peak Trading Research presented this month's systematic strategy for 5-year Treasury note futures. The strategy is a mean-reversion approach that trades in the direction of the long-term trend. It is the 25th consecutive Strategy of the Month published by the firm. The strategy is fully coded in EasyLanguage for the TradeStation platform.

Strategy Logic

The system uses two market regime conditions:

• Bear market: Defined by a 250-day moving average.
• Bull market: Defined by the same 250-day moving average.

Futures prices are expected to rise in a bull market and fall in a bear market.

Entry Rules

In a bear market, the system sells short when prices rise to new highs over the lookback period. In a bull market, it buys when prices fall to new lows. The strategy therefore buys dips in bull markets and sells rallies in bear markets. It assumes that the long-term trend in 5-year notes will continue.

Exit Rules

• Short positions: The system covers a short position when the close rises above the entry moving average.
• Long positions: The system sells a long position when the close falls below the entry moving average.
• Stop-loss: The stop-loss uses the Percent R indicator.
  • If the position is long and Percent R rises above 75, the system sells on the next open.
  • If the position is short and Percent R falls below 25, the system covers the short on the next open.

Chart Example

The presenter applied the system to daily bars of 5-year Treasury note futures. During the period shown, bond prices had been falling, placing the market in a bear regime. The system sold short when prices made higher highs. When the market moves into a bull regime, the system buys dips. When the market returns to a bear regime, it resumes selling short.

Performance Results

The presenter cited the following results from the strategy performance report. The figures include slippage and commissions.

• Net profit: $32,000 since 2005
• Maximum drawdown (peak to valley): approximately $4,000
• Average trade: approximately $2,500

The equity curve shows a steady upward slope over the period tested.

Long and Short Side Performance

The long side produced a considerably higher profit factor than the short side.

Rationale

The presenter cites three reasons for the strategy's design and performance:

1. Simplicity: The approach can be summarized in one sentence. It buys dips in 5-year Treasury futures during bull market regimes and sells rallies during bear market regimes.
2. Stronger long-side results: The long side has a profit factor of 3.85, compared with 1.58 for the short side. According to the presenter, this could make the system relevant if the Federal Reserve has finished raising rates and the economy slows heading into 2024. The presenter offered this as a possible application, not as a forecast.
3. Out-of-sample performance: The strategy has performed on new, unseen data for eight years. The presenter describes real-time performance on unseen data as the standard for judging systematic strategies.

Origin of the Strategy

The core code comes from the Strategy Factory Club package released by Kevin Davey in September 2015. The package includes extensive walk-forward testing. The presenter stated that the bull and bear regime logic is identical to the core code of the original submission. The strategy uses a different exit rule, which the presenter did not disclose. The strategy was submitted by Strategy Factory Club member TJ.