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A Multi-Strategy Approach to Trading Foreign Exchange Futures

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper “A Multi Strategy Approach to Trading Foreign Exchange Futures” by Sonam Srivastava, Gaurav Chakravorty, Sanchit Gupta, and Ankit Awasthi unveils a systematic multi-strategy approach to trading foreign exchange futures within a managed futures portfolio.

The study’s pivotal finding emphasizes the substantial potential for deriving alpha from the synergistic combination of diverse indicators, as opposed to individually hand-engineering each indicator.

Notably, the authors present compelling evidence demonstrating that amalgamating technical indicators such as momentum and mean reversion with FX carry indicators yields a remarkable enhancement over the performance of individual indicators.

Moreover, through an end-to-end systematic portfolio construction methodology that encompasses indicator construction, normalization, and combination, the research succeeds in augmenting the Sharpe Ratio of the resultant portfolio by an impressive 60% in comparison to the best performing single indicator, as evaluated in an unbiased walk forward backtest.

This comprehensive examination enriches our understanding of portfolio construction methodologies, underscoring the vast potential of a multi-strategy approach to trading foreign exchange futures within a managed futures portfolio.

Abstract Of Paper

In this article we present a systematic multi-strategy approach to trading foreign exchange futures for a managed futures portfolio. Our central finding is that there is more alpha to be derived from combining different indicators compared to hand engineering each indicator. We show that combining technical indicators like momentum and mean reversion with fx carry indicators leads to significant improvement over individual indicators. Through an end to end systematic portfolio construction methodology, including indicator construction, normalization and combination we are able to improve the Sharpe Ratio of the resulting portfolio over the best performing single indicator by 60% when evaluated in an unbiased walk forward backtest.

Original paper – Download PDF

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Author

Sonam Srivastava
Wright Research

Gaurav Chakravorty
Qplum

Sanchit Gupta
Qplum

Ankit Awasthi
affiliation not provided to SSRN

Conclusion

In conclusion, the research paper “A Multi Strategy Approach to Trading Foreign Exchange Futures” authored by Sonam Srivastava, Gaurav Chakravorty, Sanchit Gupta, and Ankit Awasthi offers a compelling and comprehensive examination of a systematic multi-strategy approach to trading foreign exchange futures within a managed futures portfolio.

The study’s central finding vividly illustrates the substantial potential for deriving alpha from the combined indicators, surpassing the performance of individually hand-engineered indicators. The authors’ demonstration of the noticeable enhancement achieved by amalgamating technical indicators such as momentum and mean reversion with FX carry indicators strengthens the case for the multi-strategy approach.

Notably, the end-to-end systematic portfolio construction methodology described in the research yields a remarkable improvement in the Sharpe Ratio of the resultant portfolio, affirming the potential of the multi-strategy approach in trading foreign exchange futures.

This insightful research significantly contributes to our comprehension of portfolio construction methodologies and underscores the substantial potential of a multi-strategy approach to trading foreign exchange futures within a managed futures portfolio.

Related Reading:

Carry Trades and Global Foreign Exchange Volatility

Volatility Risk Premia and Exchange Rate Predictability

FAQ

Q1: What is the main focus of the research paper “A Multi Strategy Approach to Trading Foreign Exchange Futures”?

A1: The main focus of the research paper is to present a systematic multi-strategy approach to trading foreign exchange futures within a managed futures portfolio. The authors aim to explore the potential for deriving alpha by combining different indicators, contrasting this approach with individually hand-engineering each indicator.

Q2: What is the central finding of the study regarding trading foreign exchange futures?

A2: The central finding of the study emphasizes the substantial potential for deriving alpha from combining different indicators rather than individually engineering each indicator. The research demonstrates that amalgamating technical indicators such as momentum and mean reversion with FX carry indicators leads to significant improvement over the performance of individual indicators.

Q3: How does the research contribute to portfolio construction methodologies?

A3: The research contributes to portfolio construction methodologies by providing evidence of the effectiveness of a multi-strategy approach to trading foreign exchange futures. The authors present an end-to-end systematic portfolio construction methodology, including indicator construction, normalization, and combination. This methodology results in a remarkable improvement in the Sharpe Ratio of the portfolio compared to the best-performing single indicator.

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