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From "Pits" to Electronic Trading: How to Exploit Modern Markets - YouTube
Channel: Unger Academy USA
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Hey everyone!
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One of the coaches of Unger Academy here,
and today we're going to be looking at the
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performance of futures over time and the differences
we see today with e-marketplaces compared
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to the past, when instead most of the contracts
were traded in physical exchanges, in person,
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and in very different ways from how it is
today.
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Before we begin, however, I invite you as
always to leave us a Like to this video, subscribe
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to our channel, and click on the notification
bell to stay updated on the release of all
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our new videos.
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Thank you very much!
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Okay, so let's start with a brief review of
what the past was like.
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First of all, it was certainly very different
from today.
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Before '98, the year in which we can date
the advent of electronic futures markets,
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100%t of these contracts were traded on so-called
"open outcry" or in-person exchanges.
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And this was the case for quite some time.
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Indeed, it鈥檚 believed that the very first
trading, and we can see an image here, took
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place in 1848.
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This image is taken from the headquarters
of the CBOT - Chicago Board of Trade - in
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1900.
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As you can see at the beginning, it wasn't
such a crowded place, although it was the
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early twentieth century.
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The first futures to be traded were Wheat
and Cattle.
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And these places, as mentioned before, were
mainly visited by a few people.
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Who were they?
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Well, the producers of that commodity who
had an interest in trading futures to protect
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themselves from any rise or depreciation in
commodity prices.
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Then over time, the first speculators or traders
also started to appear.
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And I can also tell you that all the other
futures, metals, energy, stock indexes, the
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bonds, the currencies, arrived later only
in 1981.
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Here we can see an image of the Nymex, which
is another in-person exchange of the Chicago
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Mercantile Exchange Group, but based in New
York.
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And here is the Crude Oil pit.
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So, in this case, we can see little amphitheaters
inside the exchange with market makers in
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the center of this pit that were setting the
price.
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And there were lots of traders around them
who were instead trying to execute their orders
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at the best price.
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How did they attempt to execute the orders?
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They used gestures.
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You have to get into the perspective that
these places were very populated.
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Since these were open trades, the tension
was always very high, and as a result, all
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this resulted in so-called "regulated" chaos.
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Indeed, I鈥檇 like to say that there were
very precise rules about how to place orders
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and what gestures to make to avoid misunderstandings
that could amount to, let's say, millions
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and millions of dollars.
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Today perhaps a young trader would have a
hard time believing his eyes seeing such images.
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As you can see, they wore very colorful, very
flamboyant jackets.
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This was because they needed to be distinguished
from the various market makers, brokers and
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other people working inside the exchange to
pass their orders and prevent mistakes.
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This image also shows some other gestures.
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The hands, as in this case, are held away
from our body indicating the intention to
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sell something.
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Instead, this other person is indicating the
quantity, so in this case a contract.
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And also, this gentleman here isn't making
a victory sign, but putting his hand on top
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of his forehead doesn't mean two contracts
but twenty contracts.
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Next, these orders were passed to the exchange
or Clearing House using these little slips
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of paper and afterward were executed on the
market.
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Gravitating around all these figures were
the brokers, whose main task was to transmit
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orders from large hedge funds or banks to
the market.
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These places had very negative sides compared
to markets nowadays.
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Just think of how many barriers to entry that
existed.
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Not everyone could enter this market.
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There was a need for a particular dress code.
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Brokers' transaction costs were very high
because at that time, there weren鈥檛 so many
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transactions yet, and as a result, brokers'
margins were lower thus these costs were then
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passed on to traders.
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And the style of trading was also profoundly
different because clearly, the traders were
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trying to, as they say, follow the trend.
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If they had identified a great investor or
the intentions of a great investor, well,
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they would maybe try to go after him and do
what he did.
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Anyway, today with e-markets we certainly
have more simplicity, lower fees, a much greater
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possibility to diversify, and also certainly
less slippage and less transactional costs.
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After this brief introduction, let鈥檚 just
move to MultiCharts, where I created a workspace
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and loaded data going back to the 1970s.
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Of course, we have data from the 1970s only
for Live Cattle, Wheat, some other commodities
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and the futures that were already present
in those years.
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Whereas the data for the S&P, Crude Oil, Gold,
and so on, are available only starting from
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1980 or so.
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So what we did was applying a very simple
strategy to these historical data.
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We can see it here.
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It's very simple.
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We're on daily bars and we'll tell the system
to buy at the previous high with stop orders
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and sell at the previous day's low, again
with stop orders.
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This line is commented on and colored green.
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If you want you could also add a stop loss.
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In this case, being a trend-following strategy,
I know that, in one way or another, if my
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trend goes wrong, I'll probably reverse my
position afterward, but for the time being
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I'll leave it commented.
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Let's try this strategy and see how it would
have worked on Gold.
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Here are the results.
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You can see that we鈥檙e starting in the late
1970s and we can date the start of these instruments,
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as mentioned, around '81.
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So, on this date here.
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And you鈥檒l see that the first, let's say,
10-13 years in the history of Gold were not
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trend-following at all.
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Which, on the other hand, from '96 onwards,
the years when e-markets were starting to
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take hold, that's when trend-following strategies
started to catch on.
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So, here it does indeed seem that as a result
of the arrival of e-markets, and more contracts
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traded electronically instead than at the
outcry, the nature of the market has changed
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profoundly.
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And it has remained so, at least it would
seem, to this day.
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Let's move on.
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Let's look at some commodities that instead,
we'll see, really have been very, very stable
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over time.
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Here the data even go from 1974 to today.
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Here you see on Coffee, where we don't see
a clear difference between before and after
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the introduction of e-markets.
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This commodity was trend-following and has
remained so over time.
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And this is also a good thing because it means
that we're basically working on a very strong
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tendency that has persisted for a very long
time.
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After all, we're talking about nearly 50 years.
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Moving on, we also see Wheat, which is very
similar.
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As you can see also in this case, we're starting
from 1970 and the trend-following strategy
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works pretty well, although with some significant
shocks...
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Please keep in mind that we didn't include
any stop loss, take profit, or exit conditions
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in this strategy.
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It's just a very simple starter script that
helps us get an idea of how the market has
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changed over time.
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And so, we see that Wheat has certainly performed
very well as well.
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Let me show you Cotton, which is another commodity
that has been very trend-following over time.
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Move on now with Live Cattle.
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Live Cattle also is an amazing trend-following
example.
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I mean look, we're also starting from 1970
and arriving in 2022, that鈥檚 52 years.
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Of course, there are some long phases, such
as here from '88 to '92-'94, where there were
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no equity spikes.
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For six whole years.
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But what's certain is that anyway in certain
phases these markets do respond well.
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Let us take a look at the S&P 500.
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As we know, this market is primarily mean-reverting.
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We only have data from '97, when it started
to become, let's say, mainly electronic, or
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at least half of the contracts started to
be traded through "virtual" exchanges, or
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at least online.
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And we can see that there has been some consistency
in the results, suggesting that strategies
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based on a reversal logic, which is the opposite
of what we see here, could certainly work
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well.
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And we've actually seen it work since around
the start of this e-marketplace.
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Let's go through a roundup of other futures.
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This is Crude Oil, also Crude Oil is very
interesting and very trend-following since
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1983, from when we have the data.
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Natural Gas, another energy market, is also
really stunning.
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Again, we're starting from the 1990s and we
don't see any differences.
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In short, apart from what we had seen on Gold,
where we saw a clear difference, here is before
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and after, we can say that with the advent
of e-markets, these markets have continued
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to respond in much the same way.
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Of course, with alternating phases and moments,
but they've certainly proven to be consistent
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over time.
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This could be because in moments of euphoria
or even panic, the human being who is behind
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all the decisions we make, tends to make standard
decisions or at least decisions that return
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over time.
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Before we say goodbye, though, I'd like to
leave you with a piece of advice.
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If you are interested in learning more about
how systematic trading works, in the description
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of this video you'll find a link.
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That link will take you to a page from where
you can access a free presentation by Andrea
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Unger, our founder and the only 4-time world
trading champion.
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You'll also be able to order your free copy
of our best-selling book, "The Unger Method",
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or even book a free call with a member of
our team.
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If you liked this video please don't forget
to leave us a like and subscribe to our channel
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and go and click on the bell to stay updated
on the release of all our new videos.
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Thank you again so much for watching this
video and I will see you in our next one,
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bye-bye!
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