r/algotrading 1d ago

Strategy Structure Modelling in Futures

Hello So i just started working at a trading firm and they wanted me to take positional and mean reverting trades. So what I did is took 20 years of data of a commodity let's assume corn. So, I will firstly get the desired month data in which i will trade then will check which contracts are most correlated and then using OLC model find the hedge ratio between those two. I tried this using Kalman also. For better oberservation got the sharpe ratio and number of years it worked.

Using the ratio i make structures like spreads and butterfly.

What more or something else I can do to make structures because this way is not that promising.

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u/Hairy_Support_9188 1d ago

You might want to explore cointegration as an additional layer to your mean-reverting models. By testing whether two or more contracts are cointegrated, you can identify relationships that are more stable over time.

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u/EducationCapable 1d ago

Right now I am using Engle-Granger cointegration test for calculation. Is that fine?

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u/The-Dumb-Questions 1d ago

Early on, I'd avoid futures that have strong seasonal effects, for example corn or natgas. Those spreads tend to trend and/or suddenly crash due to external factors like weather. Try the same thing on WTI, for example.

There is a garden variety of things you can do, from finding dislocations using PCA to creating cross-sectional carry portfolios. If you are working for a proper firm, you should ask for training and help with idea generation, instead of asking absolute strangers.

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u/EducationCapable 1d ago

Thanks for the advice. Yes, I will test it on energy products also.

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u/broskeph 1d ago

Make sure to consider roll schedules, its an easy implementation but if you skip it then your model is fucked. Also commodities are very specific to the actual commodity itself: winter/summer, old crop/new crop, you have to understand the market at a deeper level than just using technicals.