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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Wednesday, August 26, 2020

Sugar Raw and Sugar White

by Century Financial in Investment Insights

Sugar Raw and Sugar White
Sugar Raw Sugar White Pair Trade

*This performance is only observed with historical backtests and not traded by the company.

Sugar Raw and Sugar White are known to have a very high correlation of +80%. But what's not known is that between the period of September-November Sugar Raw has outperformed Sugar White in 9 out of the last 10 years. While the reverse is true between the period of March-May where Sugar White is seen outperforming Sugar Raw.

The table below shows the performance of Sugar Raw and Sugar White between September-November period for the last 10 years. Historical data shows that in a $100,000 account, buying sugar Raw worth $250K and selling Sugar white $250K between September-November period for the last 10 years would have resulted in almost 200% profit with 5x leverage. That strategy offered a hit ratio of 90% with max gain of 54% and max loss of -2%, while the average return was 20%. (Transaction costs have not been considered in the returns below)

Performance from Sep-Nov period every year (generic contracts)
Year Sugar Raw Return% Sugar White Return% Buy Sugar Raw Sell Sugar white 2x leverage Buy Sugar Raw Sell Sugar white 5x leverage Profit in each Year $250k exposure on both sides Cumulative Account value $250k exposure on both sides
$100,000
2010 39% 23% 17% 42% $42,012 $142,012
2011 -20% -20% 0% 1% $531 $142,543
2012 -2% -8% 6% 15% $14,898 $157,441
2013 5% -3% 8% 20% $19,664 $177,105
2014 1% -4% 4% 11% $11,186 $188,292
2015 40% 18% 21% 54% $53,530 $241,822
2016 -1% -1% -0.7% -2% ($1,840) $239,982
2017 5% 1% 4% 10% $9,544 $249,526
2018 21% 8% 13% 34% $33,659 $283,185
2019 16% 11% 5% 13% $13,411 $296,596
Sum Total 79% 197% $196,596 $296,596
Average 8% 20%
Hit ratio 90% 90%

Technical analysis also supports the current pair trade signal. As can be seen in the lower half of the graph below, Sugar Raw-Sugar White Ratio has oscillated between 0.03 and 0.04. Currently the ratio is near the lower end of the range and is expected to increase further. Besides, the ratio has bounced from the support line and is expected to rise further. Also, its visible in the upper half of the graph, that prices generally deviate between September & November.

Sugar Raw Graph

Risks & Assumptions

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The strategy might suffer from look-ahead bias which occurs due to use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
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Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
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Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
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The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
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Drawdowns in actual trading can be higher than the tested system and loses could significant in the event of leverage.
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Unforeseen events can lead to variation in performance from the tested trading strategy.
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The tested result has been computed with price feeds available from Bloomberg.
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The testing environment has not considered transaction or any other costs.
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Trading indicators used for the purpose of testing has been provided by Bloomberg.
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The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg

Arun Leslie John
Chief Market Analyst

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