MCX Commodity

Backtesting Commodity futures

Whoa, this certainly got my attention! Since I am not a journalist, I don't normally go around challenging claims made by the United States government. But if this statement, which is basically the efficient market hypothesis, is generally true, then all of us traders should just pack up and go home. Now whether or not the efficient market hypothesis is true is subject to much academic debate. But is it right for the government to state definitively that this hypothesis is true, and that all claims otherwise are "fraudulent"?

Political arguments aside, I think that the commodities market may have more arbitrage opportunities (i.e. less efficient) than the stock market. Perhaps this is because there are more participants in the commodities markets that are not speculators, particularly for "consumption" commodities such as oil and gas.

This is not to say that every seasonal pattern that we have backtested is necessarily going to repeat itself. Many of these patterns occur only once a year, and there are just so many years that we can use for our backtest, and needless to say, most of them are "in-sample". My practice is to paper-trade the pattern for at least one year going forward as an "out-of-sample" test, especially if the pattern is not supported by a strong fundamental rationale (like the Australian dollar trade that I talked about in my premium content area.) Furthermore, by publishing my results on this blog, any future repeat of the pattern can indeed be regarded as out-of-sample, increasing our confidence in them.

My own interest in researching seasonality in commodities market was (hopefully) not piqued by the kind of snake-oil salesman that CFTC warns us about. About a year or so ago, I attended a talk given by Dr. David Eliezer at Columbia University's Financial Engineering seminar. The topic is "Structure and Behavior of Commodities Markets" in which he outlined various seasonal patterns that persist in the futures markets. Dr. was formerly the chief quantitative researcher at Goldman Sachs' commodities group. Given this academic respectability, I certainly feel emboldened to enter into the debate!

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Popular Q&A

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What is the Commodities futures market?

The Commodities Futures Market is a Data Service Center. The data of Oil, Natural Gas, Gold, Copper, Coffee, Corn, Soybeans, Sugar, Wheat and Lumber products are all recorded and available to the public to see how well or bad the economy is doing with each category.

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What is a a good commodity to trade in the future?

"I do not know. I do not trade anything, so it is hard to give advice on what would be a good commodity to trade. I do not know what you can trade. Online researches do not give much information."

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