Evolution of CTA strategy

First generation CTA trading system and strategy

The first generation of CTA trading systems appeared in the 1960s and 1970s. Due to the strong trend in the commodity market at the time, the CTA strategy achieved considerable gains at the time. The strong trend in the commodity market during this period can be attributed to the sustained economic growth and rising inflation of the economy after the Second World War. A strong trending market allows a simple trend tracking system to achieve better returns. The first generation CTA system handles fewer basic markets and varieties, and the trading system is relatively simple, usually a trading system that tracks multiple trading targets. This strategy worked well because of the trend in the commodity market at the time.

The strategies used in the first generation of trading systems are those that are now familiar with trend-tracking strategies, such as moving average systems (plus some simple filtering conditions, such as when the short-term moving average exceeds the long-term moving average or vise versa), A simple trend-tracking strategy can effectively play a role in the continuous trend of the fundamentals of trading objectives. Sustained economic growth, inflation and the oil crisis are the reasons behind this persistence. But when many traders use the same strategy and the persistence of fundamentals no longer exists, the first generation trading strategy needs to evolve to adapt to the new environment.

Second generation CTA trading system and strategy

Due to the decoupling of the dollar and gold, the financial futures market developed rapidly between 1970 and 1980, allowing futures management funds to participate in many futures markets, including money markets, bond markets, stock index futures and equity financial derivatives. In addition, the development of information technology and low cost make it easy to obtain data during the day. The increase in the size of funds entering the CTA fund and the increase in competition have made the CTA strategy more complex and adaptable.

Based on the above market characteristics, the second generation CTA trading system and strategy have the following characteristics compared with the first generation CTA strategy:

1. The theme of the transaction is more diverse. The addition of the financial futures market has made trading varieties and markets more diverse.
2. Above the trading strategy, the strategy of the second generation CTA trading system is not limited to pure trend tracking and price breakthrough. Apply more mathematical models to monitor multiple markets. Whether to use trend tracking based on different market conditions or average response strategies. As many institutions participate in the liquidity of the futures market, the period of continued low volatility in the futures market has also emerged. In this case, the traditional first-generation CTA system is difficult to make profit and adapt to market changes. The strategy has become important.
3. The second generation CTA strategy can make short-term transactions in the trading window and holding time. Unlike the first-generation CTA strategy, the second-generation strategy has begun to monitor intraday trading patterns for short- and high-frequency trading. This feature stems from the development of computer technology, making the provision of financial data more timely and frequent.

Third generation CTA trading system and strategy

The third generation CTA trading system is a further diversification, decentralization and more adaptability of the second generation trading system. The third generation CTA uses more trading systems to trade more markets and varieties. In terms of strategy, use a more profitable market model. All of this is based on a combination while running multiple models in multiple markets.