A Short List of Candidates

You can’t trade everything. Well, at least you can’t trade everything well. At some point, you should limit the universe of things you trade. And it’s okay. You don’t need to trade everything because quite frankly, nobody knows what you’re talking about anyway at the weekend cocktail party, and they don’t care. I implore you to be prudent in this way: commit to trading a specific world of underlyings, and quit chasing bright lights in the depths of the ocean, like everyone’s favorite Nemo character, Dory the Blue Tang.

It can be anything such as large cap stocks, penny stocks, major currency pairs, or just one stock or currency pair. Or just the ES futures. Or you can make the case of trading what is cool and in vogue, such as GOOG into earnings, or gold stocks when everyone is buzzing about gold. I’ve chosen to trade the universe of liquid futures. And I’ve wittled down the list of qualifying candidates to just fifty-two.

My list is crafted carefully around major market groups, which have a tendency to inter-relate and correlate. The basic groups include:

1. Currencies (7)
2. Interest Rates (10)
3. Equities (9)
4. Metals (5)
5. Energy (4)
6. Commodities (17)

Currencies:

This group includes the Dollar, Euro, Pound, Yen, Aussie, Swiss Franc and Canadian Dollar. Pretty much the major currencies with the Aussie and Canadian related to commodities.

Interest Rates:

This groups consists of US Treasuries (2-year, 5-year, 10-year, 30-year), the Eurodollar and foreign treasuries that include the Canadian 10-year, the Gilt Long Bond (British debt), and the German debt complex of Eurobund (10-year), Euro BOBL (5-year) and Euro Shatz (2-year). Potential inter-market relationships between these markets and both the currency and equity markets abound.

Equities:


Okay, the standard US equity markets need to be included. I’ve chosen to leave out the DOW futures and focus on the S&P; 500, Nasdaq 100 and the Russell 2000. For international exposure I’ve included the Nikkei (Japan), CAC 40 (France), Euro STOXX 50 (Europe), FTSE 100 (Britain), DAX 30(Germany) and the Heng Seng (Hong Kong).

Metals:


You can’t leave out gold or silver. Their ratio is actually an important metric. I’ve also included other precious metals such as platinum and palladium (think catalytic converters and cell phones), and the base metal of copper.

Energy:

Of course we include crude oil and natural gas. Also included are refined products such as heating oil and gasoline.

Commodities:


This is the largest group, so let’s divide it up into Grains, Livestock, Forest and Softs (I’m following the CME Group convention here).

Grains include corn, wheat, soybean, soybean oil, soybean meal, oats and rough rice.

Livestock includes live cattle, lean hogs, feeder cattle and everyone’s favorite future – pork bellies.

Forest includes lumber.

Softs include cocoa, coffee, cotton, sugar and orange juice.

And that’s it.

Just 52 underlyings, many of which have interesting inter-market relationships.

This is my final roster of players, and they will all participate in future backtesting regimes. Will I trade them all? No. Money management may limit the total number of underlyings to a small percentage of the universe, but those 5-7 futures will represent a good diversification of product, and will also be the best representative for a particular trading strategy.

Dory got confused once in Finding Nemo and said: ‘I don’t know where I am… I don’t know what’s going on. I think I lost somebody but I, I can’t remember.’ Don’t be that fish.

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