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Trying to get my head around a simple futures backtest, namely trend. What I am struggling with is after back-adjusting (Panama canal) 10 year bond futures, I'm left with negative prices in the series. How on earth can I use this in a portfolio context? I'm familiar with using returns (both simple and log) but that clearly can't apply in this case. How do I go about position sizing and constructing a PnL from these negative prices?

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  • $\begingroup$ How do you define trend ? If Trend is defined as "price today is higher than price 12 months ago" then it doesn't matter if prices can go negative, you can still compare prices even after the adjustment to determine the trend. If Trend is defined in some more complicated way(s) then you may need to keep two prices series, unadjusted (for trend calculation) and adjusted (to measure the profitability of your trades). $\endgroup$
    – nbbo2
    Commented Dec 10, 2023 at 14:48
  • $\begingroup$ To keep it simple let’s assume it’s just price today above or below price 12 months ago. So extracting a trend signal is OK as you point out and no need to keep an unadjusted series. Now let’s say I have a signal that says long 10 year futures, I need to construct a position which requires trading a price, obviously I cannot trade a negative price… whats the correct way to construct a position and measure its PnL in this case? $\endgroup$
    – flexington
    Commented Dec 10, 2023 at 15:01
  • $\begingroup$ In bond futures your profit is (price of sale - price of buy) times number_of_contracts time 1000, where price is the adjusted price (which may be negative but so what, it is the price difference between where you bought and where you sold that matters. And the difference is accurate when you use adjusted (rolled) price, you "made" of "lost" X points. $\endgroup$
    – nbbo2
    Commented Dec 10, 2023 at 15:40
  • $\begingroup$ So if you use dollar P&L (rather than return) it is straightforward, and this is usually how futures backtests are done, in dollar terms. $\endgroup$
    – nbbo2
    Commented Dec 10, 2023 at 16:03
  • $\begingroup$ Makes sense. Thanks a lot! $\endgroup$
    – flexington
    Commented Dec 10, 2023 at 23:11

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