EXECUTIVE SUMMARY: This is the seventh in a planned series of articles reviewing and summarizing the estimated performance of selected trend indicators for hedging grain based on simple moving averages. Focus of the first three articles was on harvest delivery, and focus of articles four through six was on storage contracts. The main objective was to document the comparative performance of selected indicators to help producers choose the ones that are most likely to assist in making effective and timely price risk management decisions.
A template was created in a spreadsheet format using the last 300 days of the grain contracts for 2008-2012. Formulas were written to simulate hedging decisions for nine moving average based indicators and to calculate the hedging gains or losses based on the predefined hedging rules. The hedging rules were then modified slightly to give greater emphasis to major trends, and the performance improved for all six commodity and contract combinations.
Multiple indicators produced $0.50 or more hedging gain (commissions and fees ignored) for Dec and July corn, $1.00 or more for Nov and July soybeans, $1.30 or more for Dec wheat, and $0.80 for July wheat. At minimum, two indicators for Dec corn and wheat, and four indicators for July corn, soybeans, and wheat produced No Losing trades in this five year period.
The bottom line is that simple moving averages can be monitored in a spreadsheet format and used to make effective and timely hedging decisions. The performance is consistent, reliable, and verifiable.
I trust that you have read the first two articles (wheat and corn) which contained more detailed information about the backtesting approach and caveats about the data. If you have not read one of the previous articles, please do. The results reported here are based on the last 300 trading days of the contracts. While the results are believed to be as accurate as reasonably possible, they should be reviewed as research analysis results and not as “black box” trading systems.
The package of six articles contains a lot of numbers and it would be very easy for a beginner to throw up their hands and say it is too complicated for me. It is true that it is a lot of material, but not true that you need to give up. I believe you should take the time to digest the six articles, but that DOES NOT mean that you have to be able to reproduce all the work. The results of the performance evaluation were presented so that you can focus in on indicators which are most likely to accomplish your objectives.
Let there be no doubt. There are significant differences in the way technical indicators perform for different commodities and different market conditions. The secret is to find the indicators that perform the best across a wide range of conditions and time periods. The test period from 2008 to 2012 includes some of the most challenging variations and market behavior which you are likely to encounter. The fact that an indicator worked in the past is no guarantee that it will work in the future, but it is a great start and puts favorable probability directly in your corner.
Let’s see if we can boil all the numbers down to some useable information. Perhaps it will be useful to discuss and summarize the results by commodity this time. Since the modified trading rules produced superior results in all cases, let’s start by narrowing down the discussion immediately to only the modified results.
Starting with corn, the four indicators which produced no trading losses in five years on both Dec and July contracts are: MA(5,35), MA(17,35), CL&MA(17), and MA(35). With only $0.03 difference in the average hedged price on the Dec contracts, and $0.04 difference on the July contracts, it would be hard to distinguish between the four indicators.
Moving to the soybeans, all of the indicators produced some losing trades on the Nov contracts, but five produced no losses on the July contracts. These five are: MA(5,17), MA(5,35), MA(17,35), CL&MA(35), and MA(35). Clearly MA(35) stands alone in this group with an average hedged price of $14.51. The other four are all within a $0.33 range. It should be noted that CL&MA(35) only produced one losing trade in five years on the Nov contracts, and that was only a $0.20 loss. In similar manner, MA(35) only produced two losing trades of $0.16 and $0.08 in five years on the Nov contracts.
Next we turn to wheat. Two of the indicators on the Dec contracts and four of the indicators on the July contracts produced no losing trades over the five years. The two indicators for Dec are: MA(5,35) and MA(17,35). They are joined on the July contracts by CL&MA(35) and MA(35). In all six cases, the indicators only gave one sell signal per contract year or maintained and open position for the rally into the contract close. For cash hedgers, this is nearly ideal.
So what have we learned after analyzing 30 contracts covering three commodities, two delivery times, and five years? Perhaps the most important point is that simple moving averages which we all understand can be used effectively to track price trends and manage price risk for these three commodities. Second, the indicators can be set up in a spreadsheet format so that it is not necessary to purchase expensive software to monitor a technical indicator system. Third, it is possible to set up the spreadsheet to calculate the closing price that will trigger a hedging signal the next day. Fourth, having your own monitoring system based on quantitative technical indicators gives you much more confidence in your marketing plan and takes most of the emotion out of the process.
If I were new to technical analysis, I would begin by setting up a spreadsheet with MA(5,35) and MA(17,35) to monitor corn and wheat. For soybeans, I would use CL&MA(35) and MA(35). Then I would compare these hedging signals with alerts from other sources, and draw my own conclusions.
Good luck, and let me know if you have problems or need help getting started.
Remember that all of the above analysis was accomplished by dropping a data set for the contracts into a spreadsheet, and then programming in the trading rules and accounting formulas to keep track of the gains and losses. In keeping with the overall goal of the website, these are all things you can do at your own desk.
Posted by Keith D. Rogers on 21 September 2013