We provide two bond indices or fuel gauges – one based on daily data that should help short-term traders and a second based on weekly data for longer-term PM’s. The question naturally arises – How do I use them to make money? or “Prove to me that they do work as trade filters.”
We’re going to combine the daily and the weekly gauges together so we get a slightly longer holding period than if we used the daily alone and because the weekly gauge does add value. The weekly will have the same weight as the daily.
A 70 level looks to be a reasonable minimum for us to be excited about since there are 110 occurrences above that level and below 30. So now we can set up a simple way to test the combo-gauge efficacy. Our rules are:
- Buy US long bonds if the combined index rises above 70 and RSI(2)<30
- Sell the Position if it falls below 60
- Short US long bonds if the index falls below 30 and RSI(2)>70.
- Buy to cover the short if the index rises above 40.
- No stops or profit targets
You can see we added another short-term filter to improve our entries. It has to be relatively easy to satisfy since we don’t want to miss a rally or a big decline because that filter is not fulfilled.
Here’s what some trades look like:
This is clearly not a finished system but the gauges can be used as additional filters to go along with your own preferred technical method or your discretionary analysis of policy and inflation. This is what the equity curve looks like (with 1 tick of slippage per side):
The system earns $94K since 11/’08 and of that total $41k is made on the short side – in a market that rallied substantially over the period. Finding a system that makes money on the short side over the last 10 years is particularly hard and especially valuable if you believe that bonds are not as likely to be in a long-term bull market over the next ten years.