 Index tracking trading is a strategy where you observe price on the previous ‘n’ candlestick and make your bets accordingly. The intuition is that MSCI FUTURES follows the ETF. Hence if ETF is performing well we assume MSCI FUTURES perform well too thus making buying and selling decision accordingly.

#### Who can use it?

People interested in algorithmic trading and those who want to learn about ETF as a lead indicator.

#### How it helps?

• Build a strategy with ETF as a lead indicator
• Understand the trading logic of strategy implementation

As the trading logic is coded in the cells of the sheet, you can better the understanding by downloading and analyzing the files at your own convenience. Not just that, you can play around the numbers to obtain better results. You might find suitable parameters that provide higher profits than specified in the article.

#### Explanation of the model

In this example we consider the MSCI FUTURES data. We track an ETF and assume that the MSCI has a strong positive beta with the ETF. We observe the 5 minute intervals prices of ETF and MSCI and buy/sell MSCI based on the ETF returns. If the ETF returns are positive we buy one lot of MSCI FUTURES. If the ETF returns are negative we sell one lot of MSCI FUTURES. The ETF we track is Indian SP Equity. In essence we go long (buy) on MSCI futures if the ETF is bullish and go short (sell) on MSCI FUTURES if the ETF is bearish.

The data used for MSCI FUTURES contract is the data separated by 5 minute interval from 2nd Feb 2015 to 4th of March 2015.

#### Assumptions

2. Prices are available at 5 minutes interval and we trade at the 5 minute closing price only.
3. Since this is discrete data, squaring off of the position happens at the end of the candle i.e. at the price available at the end of 5 minutes.
4. Only the regular session (T) is traded
5. Transaction cost is $1.10 for MSCI FUTURE. 6. Margin for each trade is$1500.
7. Trading quantity is 1 lot (MSCI order size 50) and trading hours are 11:30 a.m. to 5:55 p.m. SGT.

#### Input parameters

Please note that all the values for the input parameters mentioned below are configurable.

1. Price at the end of 5 minute interval is considered.
2. We use ETF as a lead indicator

The market data and trading model are included in the spread sheet from the 12th row onwards. So when the reference is made to column D, it should be obvious that the reference commences from D12 onwards.

#### Explanation of the columns in the Excel Model

Column C represents the price for ETF.

Column D represents the price for MSCI FUTURES.

Column E represents log returns of ETF data.

Column F represents log returns of MSCI data.

Column G represents average returns of ETF data.

Column H represents average returns of MSCI data.

Column I calculates the trading signal. The formula =IF(G13="", "", IF(G13>H13, "Buy", IF(G13<H13, "Sell", "I12"))) means if the entry in cell G13 is blank then keep I13 blank otherwise if G13 (MSCI FUTURES data) is greater than H13 then buy signal for the MSCI FUTURES contract is generated else if G13 is lower than H13 then sell signal for the MSCI FUTURES contract is generated.

Column J represents trade price. This is the price at which the trading signal is generated. The formula =IF(I13="", "", IF(I13=I12, J12, D13)) means if the entry in cell I13 is blank then the entry is blank. Otherwise if I13=I12, then the trade price is given by the entry in J12. If I13 is neither blank nor equal to I12 then the trade price is given by D13.

Column K represents the Mark To Market. The formula =IF(OR(I13="", I12=""), 0, IF(I13=I12, K12, IF(I13="Buy", K12+J12-J13, IF(I13="Sell", K12+J13-J12, 0)))) means if the cells I12 or I13 are blank then the MTM is zero. Otherwise if I13=I12 then MTM is K12 else if I13 is not equal to I12 and if I13 = “Buy” the MTM is given by K12+J12-J13 if I13 is not equal to I12 and if I13=”Sell” then MTM is given by K12+J13-J12.

Column L represents the profit/loss status of the trade. The formula =IF(OR(I13="", I12=""), "", IF(K13<K12, "Loss", IF(K13>K12, "Profit", IF(I13<>I12, "NPNL", "")))) means if either I13 or I12 is blank then the profit entry is also blank. Otherwise if K13 is less than K12 the entry is loss, if K13 is greater than K12 the entry is profit. The next part I13<>I12 means if I13 is not equal to I12 then it’s No Profit No Loss (NPNL). This makes sense since we have already calculated profit from previous squared off position.

Column M calculates the trade profit/loss. The formula =IF(L22="", 0,K22-K21 ) means if L23 is blank meaning no profit no loss then the trade profit/loss is zero. If L23 is not blank then the profit is calculated as the difference in MTM values.

#### Outputs

The output table has some performance metrics tabulated.

Number of profitable trades is 118 and the number of loss making trades is 77.

Total trades are 277 and the total profit is $1970. Average profit per trade is$7.24. Net profit per trade is \$5.04. This is calculated as average profit per trade minus twice the transaction costs. Number of trading intervals is 23. Monthly returns calculated as the product of total trades and net profit per trade divided by the product of margin for each trade and the number of days interpolation