Doubling Buy-and-Hold Returns with Micro E-minis
Active trading, such as day trading on intraday data, is a popular approach with many traders and has been the focus of many of my newsletter articles. Nonetheless, there are reasons to consider longer-term strategies as well. For some traders, the extra time and effort required to manage an active trading strategy may not be worth the potential reward, especially considering the additional risk that often accompanies active trading. Also, even if your focus is short-term trading, it might be worthwhile to add a longer-term strategy to your trading portfolio for diversification.
If you've ever considered developing a longer-term strategy, you might have wondered if it would be possible to come up with a strategy that trades infrequently, similar to a buy-and-hold investment, but with the higher returns of a trading strategy. For example, an obvious approach would be to buy a stock index ETF with two-times leverage. Doubling the leverage should (approximately) double the return of the index. Unfortunately, virtually all broad stock indexes have dropped more than 50% at some time in the past 20 years. With 2x leverage, a 50% drop in the index means a 100% loss. What's needed is a way to avoid the big market declines while being in the market for most of the rallies. In other words, we need a little bit of trading logic. If possible, this would give us the ideal compromise between the simplicity of investing and the higher returns of trading.
This article will demonstrate how to achieve these goals using the new Micro E-mini index futures from the Chicago Mercantile Exchange (CME). I'll start with an overview of the Micro E-minis and show how to use the strategy generating tool Adaptrade Builder to build some relatively simple strategies that generate double the return of the underlying index while maintaining drawdowns at manageable levels. The code for the top strategy is available below.
The Micro E-mini Index Futures
In May of this year, the CME started trading new stock index futures contracts called the Micro E-minis, which are one-tenth the size of the regular E-minis. The smaller size makes it possible to use small amounts of leverage with a fairly small account. For example, with the S&P 500 at a price of 3000, the value of the futures contract is $15000, so an account size of $7500 could buy one contract at 2x leverage. To obtain leverage of no more than 2x with one contract of the regular E-mini at the same price would require an account size of $75000. The available Micro E-mini stock index futures are listed below in Table 1.