What is Intermarket Analysis?
Intermarket analysis is a method of analyzing one market based on another market or their intermarket relationship. Common intermarket analysis techniques include correlation, cointegration, and relative value. However, in its simplest form, one can also trade one market based on what another market is doing on its own.
Intermarket Analysis Trading Strategy Example
In this week’s Free Friday strategy (#9) I display a strategy built using inter-market signals. Inter-market signals/analysis is the ability to generate trading signals and filters for a primary market based on what another market may be doing.
For example, you may only want to buy the stock market when gold is trading lower or when bonds are below their 200 simple moving average.
Build Alpha now let’s you test these exact sort of scenarios and build strategies taking into account up to 3 markets (plus Vix). This specific strategy was built for SPY (S&P500 ETF) but takes into account Gold (GLD ETF) and holds for a maximum of 2 days.
There are no other exit rules or sophisticated risk management; all trades assume only a 100 share position for testing purposes.
The Entry
1. $SPY’s 2-period RSI <= 90
2. Gold’s 50 period simple moving average is greater than Gold’s 200 period simple moving average
3. Gold closed below both its 10 period simple moving average and its 50 period simple moving average
The Exit
Exit after holding for 2 days
The grey line is buy and hold for SMH. You can see since early 2012 (the beginning of our out of sample period) we have much superior risk-adjusted return.
Also, please note that the test was done using only 100 shares per trade. This is essentially nothing, and does not account for underlying price changes over time, but this post is for demonstration purposes only.
Intermarket Analysis with Build Alpha
For a better explanation of inter-market signals and how to configure Build Alpha to generate strategies based on them please watch this short video I made: https://www.youtube.com/watch?v=CaFRO_gvR-8
There might even be TradeStation/MultiCharts code in the video?!?
Step 1 – Select Symbols
In the upper left, select the primary symbol in the Symbol dropdown. This is the primary market that the automated trading strategy will execute trades on. Next, select a symbol for market 2. This is the secondary market we can use to generate intermarket technical analysis signals.
Step 2 – Select Signals
Scroll down in the built-in signal library and notice signals prefixed with “market 2”. These signals are calculated on market 2 and can be used to generate signals to trade the primary symbols. If you have selected a symbol for market 3 you may also notice signals prefixed with “market 3”.
Step 3 – Run Simulation
After selecting your symbols and signals, hit simulation. Build Alpha will begin building the best automated trading strategies based on your inputs. If the strategy results do not use any market 2 (or market 3) signals that is because these signals did not improve or enhance performance.
Thanks and enjoy the weekend,
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Author
David Bergstrom – the guy behind Build Alpha. I have spent a decade-plus in the professional trading world working as a market maker and quantitative strategy developer at a high frequency trading firm with a Chicago Mercantile Exchange (CME) seat, consulting for Hedge Funds, Commodity Trading Advisors (CTAs), Family Offices and Registered Investment Advisors (RIAs). I am a self-taught programmer utilizing C++, C# and python with a statistics background specializing in data science, machine learning and trading strategy development. I have been featured on Chatwithtraders.com, Bettersystemtrader.com, Desiretotrade.com, Quantocracy, Traderlife.com, Seeitmarket.com, Benzinga, TradeStation, NinjaTrader and more. Most of my experience has led me to a series of repeatable processes to find, create, test and implement algorithmic trading ideas in a robust manner. Build Alpha is the culmination of this process from start to finish. Please reach out to me directly at any time.
