Interview with BWO – ETF Pairs Arbitrage – Mechanical Trading System
BWO is an author of one of the leading strategies on WealthSignals.
His strategy “ETF Pairs Arbitrage” is around for over 4 years by now
and has gained over 500% during this time.
Beau, your strategy ETF Pairs Arbitrage (EPA) has been one of the top performers on WealthSignals.com for several years now. Congratulations on this achievement! How did you get started as a quant, and how long have you been developing trading systems?
What is the history of EPA?
I realized that I was going to inherit some money that could become a fantastic fortune within 10-15 years and so six to eight months after QID and QLD began trading around July 2006 on March 21st 2007 I perfected Pairs Trading QID QLD Scalper. I was already looking for algorithms to use and found them at an undisclosed location on the web long since gone are its explanations and histories… however, since my Majors in High School were Mathematics, Science, and Computer Programming, I knew that either of these two strategies would deliver significant wealth to me and my family when deployed accurately. After a spat with my broker/dealer about offering these types of strategies, I went to what I believed was a more compliant web service through Interactive Brokers called Covestor. Then I went to World Cup to be an Advisor and CTA and was a trade leader at both. Although I had an outstanding record there, when I made the decision to join WealthSignals I had to terminate that relationship and that is why I am here earning way more than I did on any other site offering the types of mechanical and statistical strategies that are like what WealthSignals offers, just EOD for now, but that will likely change to RT in the near future..
If EPA fully mechanical in nature, or do you allow any of your own intuition in the signals?
- Fair Value Question: When does fair value happen? The answer is after Normalization so this is a Normalized Volatility Based Overbought Oversold Threshold,
- Overvalued and our favorite,
- Undervalued. The only intuition I really have is to take Armageddon Events seriously.. and, if one were to open I have a failsafe overlay to just exit the position and wait for Normalysis to take its power over the market once again. Emotion plays no part in my WealthSignals.
I tend to approach trading system development in a scientific fashion, starting out with a hypothesis such as “piggyback a strong breakout” or “prices revert to the mean”. What assumption did you intend to validate when developing EPA?
We noticed that often in WealthSignals.com, a publisher will submit backtest performance for their trading system, but then over time the actual performance will not live up to the backtest results. This could be due to overoptimization, survivorship bias, or other reasons. EPA, on the other hand, has actually shown a higher out-of-sample performance.
Do you have any insights into why?
Yes, I do! It’s from incorrect data pulls and the amount of data involved in each simulation an Author submits to WealthSignals. The only reason it takes tens of seconds for me to issue the EPA WealthSignal Strategy Orders is because I have to make sure the data is correct before I submit my decision to WealthSignals, and for me it comes down to whether the prices are the same as my Terminal in Active Trader Pro. Every trading day I have to check data before submitting signals and on days when I have signals to issue orders to WealthSignals I use the Order Entry Publisher from WealthSignals at 97% of equity and then a numeric value to sell and/or reverse.
Do you optimize or tweak EPA periodically, or has it remained “as is” since its inception?
Basically syntax only, no logic changes in 5 degrees of freedom out of 6500 bars when combining QID with QLD and some Linear Regression Analysis similar to that used in every one of my publications. I used to be nexial_1002002 on the old wl4.w-l site and it was on there that I found fame through my Presentation to the Kentucky Math Association in May 2005 at my Alma Matre as a Junior entitled Dip Buying using Bollinger Bands. Regretfully, until about one month ago, I had to declare that the strategy could not be implemented due to technological infeasibility. (This has changed with the advent of Quantacula). And this infeasibility declaration was also true for many years of people who counted my algo out as I was watching it accumulate massive 30% quarters nearly every quarter which is what it feels like to me when I see my TQQQ and SQQQ Returns.
ETF Pairs Arbitrage, as its name implies, is traded on a pair of ETFs. Have you tested the logic on any other assets, different ETFs, international ETFs, stocks, futures? If so, how did it perform?
I was instrumental in the development of the Quantacula Studio WealthSignals Broker Adapter which I think is a magnificent step forward for the industry I’m a part of..
Finally, do you have any advice to EU residents who want to trade “EPA” but cannot due to trading restrictions on U.S. Exchange Trades Products?
- Compute your Delta Hedge Leveraged Factor:
- Q: What is a Delta Hedged Leveraged Factor?
- A: Say you have $140,000 and NQ Is trading at 7,000. These are equivalent and so when NQ loses 70 points your equity will drop by $1400 because 70 points times $20 per point is that value and is equivalent to 1%. So by Dividing $140,000 if NQ is at 7,000 will require you to divide $140,000 by 5.63 as the amount per contract you can trade in futures.
NEWS FLASH: CME is going to begin offering Micro Contracts on NASDAQ-100 and this same process can be used on them with even smaller amounts of capital required for margin!!
- Place Trade at the right time which is 9:30 AM EST for EPA and I will only buy in SuperBands during the day and just sell at market the next day on the open, too.
WealthSignals.com at https://www.wealthsignals.com/Strategy/Detail/ETFPairsArbitrage-9IP7Vx
That’s my Whole Algo Shop with Equity Curves Shown again, at https://www.facebook.com/pg/KCCMBWO/shop
See My YouTube Channel at https://www.youtube.com/channel/UCA_6TkmtuUo71Gpp3pjmnvQ
And My Companies Youtube Channel KCCMBWO at https://www.youtube.com/channel/UC5eGEhOS1CiE1jNapjU-tOA
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