Trading Algorithm Navigation Using a Mixture Distribution Risk Model
By Andrew Milne, Anish R. Verma, Phil Goddard, & Clemens Adolphs
The CME Market Sentiment Meter (MSM) provides a daily risk–return estimate for eight products traded on CME Group exchanges: corn (C), crude oil (CL), euro/USD FX (EC), S&P 500 index e-minis (ES), gold (GC), natural gas (NG), soybeans (S), and 10-year treasury notes (TYF). The Market Sentiment Meter is computed by 1QBit using end-of-day settlement data published by CME Group. It is available as a subscription product through CME DataMine.
The MSM risk–return estimate can be used to ‘‘navigate’’ a trading algorithm. We do this by finding a ‘‘navigation parameter’’, typically an algorithm setting that works successfully at a constant value, but where the best value is sensitive to changes in market volatility. We then define a ‘‘predictor”, where an MSM time series is used to estimate the best value of the navigation parameter for succeeding days.
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