Bizarre trading strategies

All of us at some point in our trading career have struggled to find the ideal trading strategy. One that would work in all markets, in all circumstances, and that would generate profits while keeping losses to a reasonable level. Most of us have also realized over time that no such strategy exists. Instead, we have thousands and thousands of imperfect strategies, but if we learn to work with them, we can get closer to the ideal.

Trading is not an exact science, and there are many paths - sometimes quite bizarre ones - to the goal. So today, let’s look at these paths. In this article, you'll read about strategies that have approached trading in completely novel (and often ingenious) ways. After all, they were often created by one of the brightest minds from prestigious trading teams. However, even this did not always ensure their success, as you will see for yourself.

When mathematical geniuses analyse markets through football

Mixing business with pleasure can sometimes be the best way to approach things, trading strategies included. Earning money by watching football is a dream of every fan of the sport. But we're not talking about betting on sports results, at least not in the true sense of the word.

We are talking about an algorithm developed by some of the best mathematical and analytical minds of our time. They are employed by one of the big American trading companies, and what are their requirements for employment? Well, a red diploma from MIT or another Ivy League university is a must while lacking the knowledge about markets and trading in general is paradoxically an advantage! This company looks at the markets through its specific lens and likes to shape its analysts in its own image. And we must agree that there is a certain undisputed advantage in writing on a blank slate.

Think football and mathematical geniuses don’t mix? You might be onto something, but in the end, it’s all about making money. That’s exactly what this elite trading group had in mind when they turned their attention to Brazil, the heartland of football culture.

Can euphoria lead to a downturn in the markets?

The enthusiasm of the Brazilian people for football was further heightened in 2014 when the World Cup was held here, and a US trading group wanted to cash in. These traders and analysts noticed an interesting phenomenon - every time the local team won, Brazilian stock prices went down. That is, in the exact opposite direction to what one would expect during the euphoria of the home team's victory. The question remained - why?

To understand this phenomenon, we need to factor the political aspect into the equation. In Brazil at the time, President Dilma Rousseff was in power and was surrounded by a series of corruption scandals and was also perceived as corrupt by the Brazilian public. In addition to the World Cup, Brazil also held presidential elections in 2014. This was to follow the end of the football festival.

The above-mentioned phenomenon, in which the victory of the national team led to a downturn in Brazilian share prices, was thus closely linked to the forthcoming presidential elections. These were closely watched by foreign investors, for whom the prospect of the re-election of a corrupt president meant uncertainty in the markets and, consequently, uncertainty about the return on their investments. Thus, whenever it appeared that the president might win the election, Brazilian shares fell. And when else have Brazilian citizens tended to overlook corruption scandals and missteps and cast their vote for a female president in an election on a whim than when their national team was beating its opponents?

Thus, the Brazilian national team's matches were closely watched by traders and provided insight into the future course of the stock markets.
 

_{ETF for the Brazilian market iShare MSCI Brazil during the 2014 FIFA World Cup. Source: Yahoo Finance}

Analysis of trading strategy results

Brazil wins against Cameroon

The whole situation is well described in the above graph. It shows the evolution of an ETF fund on the Brazilian market (iShares MSCI Brazil). On the chart, you can notice the two purple lines, these show the important results of the football matches of the Brazilian team. The first line points to the situation on June 23, when Brazil defeated Cameroon 4-1 in the last match of the regular group. Brazilian stocks reacted to the win by selling off and gapping downwards over the next two trading days. Our US traders benefited from the huge amount of capital available to them. They made tens of millions of dollars on this relatively inconspicuous move.
 

Legendary loss to Germany

The second line shows the situation after the legendary match against Germany on 8 July. Brazil suffered a humiliating 7-1 defeat in the World Cup semi-final. The markets subsequently went higher. The chances of the president's re-election plummeted and the stock markets rose in the following days. Brazil then lost the third-place match against the Netherlands 3-0. Shares subsequently opened with an upward gap. The chart above thus clearly confirms that the strategy made a lot of sense.

And how did the presidential election turn out in the end? Dilma Rousseff eventually won, but in 2016 impeachment proceedings were launched, which were approved later that year, and Dilma Rousseff was removed from office.

Elections are boring? Not if you know the outcome in advance!

This strategy again comes from the hands of the genius traders at the algorithm trading company. It must be stated up front that its execution back then required a team of people, a degree of mathematical ability, and access to less readily available sources of information. On the other hand, however, it has been traded on a situation that may arise again this autumn.

While the presidential election might seem dull to some, for others, it's an event worth grabbing popcorn for. For traders who focus on U.S. stock indexes and the dollar, however, this is a unique opportunity. And that is precisely why our fabled group of elite traders has decided to try and make the most out of the 2016 presidential election. During October and November of 2016, the markets were extremely volatile as it was clear that the Clinton vs. Trump presidential election would be very close and the market impact could be huge.
 

The basic premise of the Trump vs. Clinton trading strategy

What was the thesis behind this strategy? The election of Donald Trump as president could be considered very bad for Mexico. Trump's campaign was based on building a wall on the border and imposing many economic sanctions on its southern neighbor. The question was, however, what would be the reaction of the US markets to the election of Trump? Before the election itself, the prevailing opinion was rather negative - Trump was expected to bring chaos and instability and the US indices were expected to fall.
 

Information headstart as an advantage

The next problem, however, was how to transfer the idea from theory to practice. Trading on publicly known information gives almost zero advantage. So the group of traders in question first analysed how the results of the US elections are announced. Of the 50 states, each announced their results at a different time and in a different way. Some had websites set up for the election, others did not. Some states even had dozens of election websites.

As you can see, the American electoral system is quite chaotic. Thus, most retail and larger traders followed the results of the US election on CNN. However, the latter often had incomplete information and was almost always significantly delayed. Therefore, our trader group decided to have one trader per state site following the election. By doing so, they will be able to have the election results available minutes, if not hours, before the public. By tracking each site and building a simple model, the trader group knew who would be president before the actual announcement on CNN.

_{Chart 2: S&P 500 Index during the 2016 US presidential election. Source: Yahoo}