This week’s oil price tremors have again validated the idea that understanding Commodity Trading Advisor (CTA) strategies “can provide a strong edge in today’s highly systematized markets,” (Nomura) and that “CTAs have long been key in understanding price action in commodities” (Rabobank). As a rule, CTAs rely on systematic trend following strategies.
Even Paul Tudor Jones, who is not a CTA hedge fund manager, learned this. In his May 2020 newsletter, he wrote that, “One thing I have learned over time is the best thing to do is let market price action guide your decision-making… Quite often, how the markets respond will be at odds with your priors.”
So how did I-System manage the most recent oil-price events? In one word: superbly. Over the recent weeks, I-System kept a largely neutral position in Crude Oil with Brent strategies maintaining net short exposure and NYMEX Crude Oil (WTI) strategies net long.
The 27 October trend reversal
With the Monday, 26 October market close, our WTI strategies signaled a long-to-short trend reversal. Exceptionally, I posted this change on LinkedIn (see here). The following day, Brent strategies added to a full short position. Over the next three trading sessions (28-29 Oct), Brent and WTI prices declined 8% and 9.6%, respectively.
Of course, we can’t predict future price changes. But to profit from a trade, taking the decisions in advance of a large trend move it is essential. Even if oil price doesn’t continue trending lower after today, a profitable starting position gives you the cushion to withstand adverse price moves. But if prices do continue declining, I-System strategies will generate a significant windfall, as they did between February and April this year:
We enjoyed similarly good results on COMEX Copper, Gold, Silver, Palladium and all other markets where we saw strong trend moves.
Extreme price events and trend following
Indeed, extreme price events are the most powerful driver of trading and investing performance. However, they are by definition unpredictable. The best way of taking advantage of them (as opposed to missing out, or getting crushed by them), is by using systematic trend following strategies. Indeed, trend following might be the best solution to the problem of uncertainty. At the very least, it can help traders get the directional exposure right at times when it matters most – when large-scale price events begin to gather momentum.
Such events have become increasingly more frequent and more severe over the recent years. This trend will likely continue and investors, traders and hedgers should enhance their market intelligence with quality trend following strategies. I believe that I-System is probably the best trend following model ever built. That’s an audacious claim, but one I am prepared to defend: here’s why. Over the past 17 years, I-System strategies never failed to capture value from major trend moves. •
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