What Can a Simple Strategy Do in the Right Market? Example On CO2 Future

by Francesco Placci

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The success of a strategy doesn't depend only on the type of approach we use, but also on the market to which we apply it. Indeed, often an elementary system applied to a highly inefficient market can produce better results than a complex system applied, for example, to a traditional stock index.

In today's video, we’re going to talk about a starter script based on this very concept. The system shown in the video is really simple, but what makes it special is the market on which it works: the carbon emission futures listed on the Endex (a segment of the ICE market).

This is one a very liquid future characterized by good intraday volatility that can be leveraged very well with the basic system shown in the video.

By watching the video you'll discover:

- What is the carbon emission future and what are its characteristics, pros and cons

- How to build our breakout system to take advantage of the volatility of this market

- The backtest results of the basic system

Enjoy the video!

Transcription

Hey everyone, welcome back! One of the coaches of Unger Academy here, and today we’re going to be talking about a future that I imagine will be unknown to the majority of you, but that is definitely of sure interest for the trading opportunities that it can guarantee us. More in detail, this future offers excellent trading opportunities especially when we trade it with a breakout logic.

The ECF Future

Okay, so what is this future that I want to tell you about? Well, it's the carbon emission future listed on Endex, which is a segment of the ICE market.

What is it all about? We all know that the environmental policy of the European Union is very ambitious. By 2050, greenhouse gas emissions will have to be reduced by 55%, so European companies must commit to polluting less and less.

So those who are unable to stay within the limits can buy certificates from those companies that are more, let's say, "virtuous". And, therefore, a European market for carbon emission certificates has been created which certainly is very interesting.

It is among the most liquid in the world, indeed probably the most liquid in the world. And new futures are also being released right now in America that have the same principle.

At the moment, these futures are not particularly liquid outside of Europe. We started trading this type of futures when it was still on the IPE market, namely the International Petroleum Exchange in London.

It's currently located on the Endex market in Amsterdam. Its ticker is ECF. Sometimes you'll also find it as EUA.

Its Historical Trend

It's a market that has grown a lot. If we look at the trend of the future from 2020-2021, we see that its price started from a minimum of €15 and touched a maximum of almost €100.

It's currently dropping sharply, and of course that you know it's because of the war between Russia and Ukraine. Because if we needed energy, because we cut off collaboration and imports from Russia, there may be no need for such a restrictive policy on carbon emissions.

This is the reason why this future recently dropped so much. The data is up to two days ago. At the moment it is already back to a value of about €75.

The Opening Range Breakout System

But why am I talking about this future? Well, because it's an excellent underlying asset where you can implement breakout systems.

It is an underlying asset that fluctuates a lot, therefore it shows a discrete volatility in intraday. And this is the reason why it responds very well to breakout logics.

So, we thought to take a 30-minute chart of this future and apply to it a simple Opening Range Breakout system. This system is really basic.

Here it is. So, the position size is based on volatility. This means that we don't always work with one contract, and the reason for that is that on underlying assets that have grown a lot, working with a fixed size of 1 contract might distort the test a little bit.

So, we buy a certain number of futures that depend on the volatility of the instrument. In high volatility conditions, we reduce the size. In low volatility conditions, we increase it. So, basically, we keep the volatility as a denominator to select the right quantity of futures to trade.

Let's talk about the entries now. They're simply based on the previous day's close plus a trigger which is based on the ATR. So, we’ll take the close of the previous day. We’ll add a percentage of the Average True Range to go long and subtract another percentage of the Average True Range to go short, in this case at 10 bars.

We exit at the end of the day. And finally, there's a stop loss which is calculated as a percentage of the notional value. In this case it's 1, which means it's 1% of the notional value.

Results

What are the results of such a simple system? Here they are. This is the overall equity line.

This is the long equity and this is the short equity, which is not bad at all given the buy and hold of the future.

It's definitely an interesting system, but I can already tell you that we could do much better. You know, the purpose of this video is not just to show you a trading system but rather to make you reason on the fact that often the choice of the instrument we're going to trade is really extremely important.

Having said that, let's take another look at the metrics. With the current settings, the system produces a gain of €218,000 with a maximum drawdown of €17,000, in a very short time of just 2 years and 4 months.

Operational Obstacles

Now, let's come to the negative aspects. Because unfortunately there are some. Being a particular future, not all brokers allow you to trade it. Interactive Brokers, for example, allows you to trade on this underlying asset. But unfortunately, it doesn't offer leverage, so the margining is quite high.

And finally, market data is also among the most expensive, so there are some operational limitations.

In conclusion, I’d like to add that since this is a future that has changed market and was initially quite illiquid, the data are not completely reliable and it isn't easy to access them.

Having said that, the key aspect of this video is one we've already highlighted several times in our videos, namely the importance of the underlying asset on which we're going to trade. Often we focus too much on building the perfect system and we don't pay the necessary attention to the instrument that we choose to trade.

Personally, I feel much more comfortable trading on an inefficient underlying asset with a simple system made up of a few lines of code rather than - if I may say so - going crazy to find the umpteenth system for example on the Dax, which requires a greater number of conditions to work, and has a greater complexity that inevitably compromises, at least in part, its robustness.

Final Thoughts

So, if on the one hand, the systematic approach to trading is fundamental, on the other hand, the choice of the underlying asset on which we're going to do systematic trading is equally important.

And if there is someone who wants to learn more about this approach to trading, which we teach here at Unger Academy, you'll find a link in the description of this video. It'll take you to a page from where you'll be able to watch a presentation of our founder Andrea Unger, who will introduce you to the world of systematic trading and to his method, which allowed him to win the world championship in real money trading 4 times. You'll also be able to get our best seller book, "The Unger Method", covering only the shipping costs, and much more.

If you liked the video, I kindly ask you to please leave us a Like and subscribe to our channel.  You will not regret it.

And with that, I will see you soon in our next video! Until then, bye-bye!

Need More Help? Book Your FREE Strategy Session With Our Team Today!

We’ll help you map out a plan to fix the problems in your trading and get you to the next level. Answer a few questions on our application and then choose a time that works for you.

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Francesco Placci

Hi, I'm Francesco Placci, a professional trader since 2005 thanks to the systematic approach to the markets.

My skills range from trading on index futures to bonds, from stocks to commodities, with a particular focus on volatility and options, which I consider to be among the most versatile and fascinating instruments available to traders.

After an experience with leading Italian credit institutions where I learned the basics of institutional finance, I became a successful independent trader, with great personal satisfaction.

Founder of Algoritmica.pro, in 2019 I joined Unger Academy as head of Research and Development.