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?

 Hi, WealthSignals, I have been a quantitative developer and analyst since May 2003. At that time, I was taking a Course called Theory of Investments at Centre College in my Financial Economics Bachelor of Science Mathematics Minor.. And, then my family decided to compete in the financial markets with me as General Partner of what we called The Nexial Investment Club Partnership, split equally amongst the immediate members of my family.

 

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?

There is no intuition to the Primary Alpha, which is my WealthSignal to trade. It uses Chebyshev’s Theorem of 1865 and the 1895 Empirical Rule of Statistics to compute either of the three possible ranges of values for the market:
  1. Fair Value Question: When does fair value happen? The answer is after Normalization so this is a Normalized Volatility Based Overbought Oversold Threshold,
  2. Overvalued and our favorite,
  3. 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?

 Mathematics from my Associates equivalent at Centre College explained that these two Theorems named above (Tchebychev 1865 and Empirical Rule of 1895), show the percentage of data above and below the mean.. This would only be intuitive to someone like myself, but, not to be glib, it was not exactly “prices revert to the mean” or “mean reversion” but it was “mean reversion through Normalization”or “Prices Revert to the Mean by Normalysis” so that was what I was trying to prove along with my Linear Regression Analysis Tricks.

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?

Yes, They have to be perfectly negatively correlated instruments to be pairs first off, and second, if you were to use these models on SSO/SDS. MVV/MZZ. DDM/DDZ…etc… Yes! I’ve tested on all of them from wl4 but not the current .Net version and they were very good performers. It’s just that S&P500 was always dip buying mostly due to oil and very correlated with the Dollar Index so after simulating a hypothetical $1600 backprice on QID and a $1 starting price on QLD the system does have validity back to 1985 and that’s as far as I can see CBOE’s NDX when these instruments became possible to simulate.
Are you developing any new trading systems that you’d like to mention?
Only one, and one of my favorite achievements: SUPERBANDS: I’d like you guys to visit my Facebook Algo Shop at KCCMBWO’s Page So You can compare the two algorithms my Family Trades and Plans to Trade and offer forever as these will have the backtested equity curve that can now be followed through WeathSignals.

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?

Guys, Double Leverage Just Means 2x Leverage. And 3x Leverage to convert from 2x leverage is the 2x return raised to the three halves (3/2) power and you can go up to 5.63 to 1 to get the returns that I get in Futures Markets if you remember these procedures:
  1. 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!!
  2. 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

Also see my twitter at https://www.twitter.com/BWorldOmnimedia
And my CV on LinkedIn at https://www.linkedin.com/in/kccmbwo
And My Company’s LinkedIn Page at https://www.linkedin.com/company/890241/

Your Best Market Place Trading Systems Provider of 2018 & 2019 by Wealth and Finance International Magazine:

Beau Wolinsky

President and SRO CEO, SEC Exempt IA, CFTC Exempt CTA, CPO
KCCMBWO
KC Capital Management Beau World Omnimedia KCSE
Kansas City Stock Exchange

MLGP
Master Limited General Partner Energy Farms US Partners MLP
MLGP

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