Nikkei 225 Trading Strategy (Backtest, Futures Example)

Last Updated on May 27, 2023

Nikkei 225 futures, which is based on the Nikkei 225 stock market average, provide investors around the globe with an efficient way to access the opportunities of the Japanese equity market, one of the world’s largest markets. Created in 1950, the Nikkei 225 index is a price-weighted average index and one of the most closely watched indexes for the Japanese stock market. If you want to trade this asset, you will need to use the right strategy. Want to know about the Nikkei 225 futures strategy?

A Nikkei 225 futures strategy is a technique and methodology you can use to profit from Nikkei 225 futures, which are financial derivative products that represent a contract to exchange a specified amount of the Nikkei 225 Index at a pre-agreed price on a future date.

This strategy may include using technical or fundamental indicators to analyze the market in order to determine an exact entry point. Traders use this method to either hedge their exposure in the Japanese equity market or speculate on the direction of the index.

In this post, we answer some questions about the Nikkei 225 futures strategy and we make a backtest.

What are Nikkei 225 futures?

The Nikkei is a Japanese stock index that is traded on the Tokyo Stock Exchange (TSE). Since 1950, the index has tracked the price of Japanese equities. From 1975 to 1985, it was known as the ‘Nikkei Dow Jones Stock Average. It is a price-weighted average that is updated once a year. The Nikkei was first calculated on July 9, 1950, and has since tracked the price of Japanese stocks.

The Nikkei 225 futures contract is a futures contract with the Nikkei Stock Average as the underlying asset. A futures contract is an agreement between a buyer and seller to exchange a specific amount of the underlying asset at a future price. Nikkei 225 futures trade on the Japanese Exchange Group and the CME Group’s Globex platform where it is quoted in both the USD and the Japanese yen.

Many large and well-known multinational corporations, such as Sony Group Corp. and Honda Motor Co., are domiciled in Japan. Investing in the Nikkei 225 allows an investor to benefit from the collective growth of these companies and many other entities in the country.

What is a Nikkei 225 futures strategy?

A Nikkei 225 futures strategy is a technique or methodology for profitably trading the Nikkei Stock Average, which typically includes the use of fundamental and technical analysis for position sizing and risk management.

You must have a solid trading strategy if you want to profit from trading the Nikkei 225 futures. Your Nikkei 225 futures strategy should include precise entry and exit points, risk management, and position sizing techniques. The market can be approached for a variety of reasons, including speculation, hedging, diversification, and arbitrage trading.

Nikkei 225 futures strategy backtest

Let’s backtest a specific Nikkei 225 strategy. We are missing futures data, and instead, we are using data for the cash index.

We are firm believers in seasonal trading strategies, and let’s find out if the turn of the month strategy works on Nikkei.

We start by calculating the best days of the month going back to 1965:

Nikkei futures seasonality strategy

Perhaps not surprisingly, we can see that the best days are at the end of the month and the first two trading days of the month (see calendar day in the first column). This is the same pattern we see in most stock markets worldwide.

Can this be made into a profitable trading strategy?

Let’s make the following trading rules:

  • We buy the close on the fifth last trading day of the month.
  • We sell at the close on the second trading day of the month.

It’s a very simple strategy, but yet very effective. This is the equity curve:

Nikkei 225 strategy backtest

All the gains over the period have come in this short seasonal time interval!

The trading metrics and statistics tell us that the average gain per trade is 0.65%, the win rate is 62%, max drawdown is 31%, and the annual return is 7.4%. Please remember that the annual return for buy and hold is a modest 5.4%, thus the strategy is “trashing” buy and hold.

Can the strategy be improved?

Yes, we added a trend filter, and the strategy got better:

Nikkei 225 strategy trading rules

The number of trades goes down from 698 to 403, but the average gain per trade goes up to 0.93%.

Would you like to know the trend filter we used?

We have made the code available in our database containing plain English code and descriptions. Please click on the green banner to learn more (and get access to hundreds of other code and trading ideas):

What is the seasonality of Nikkei 225 futures?

Seasonality in the market refers to patterns in the price of an asset that are frequently repeated at specific times of the year (months and seasons). These patterns, known as the market cycle, are usually observed over a longer period of time, such as months.

The chart below depicts the seasonality of the Nikkei futures. It is clear that the index performs better in March and peaks in May. Furthermore, there is a market decline from June to November.

Nikkei 225 Futures Strategy

What moves the Nikkei 225 — What affects the Nikkei 225 the most?

The Nikkei 225 futures contract’s growth is determined by the prices of its constituents. The index is linked to the performance of the Yen as well as Bank of Japan policies such as interest rates. Similarly, the market reacts to events in other major markets, such as the DJIA. Natural disasters are common in Japan, and the market suffered as a result of the previous occurrence. Other major index futures movers include employment data, non-farm payroll data, export data, and the GDP growth rate.

How are Nikkei 225 futures traded?

Nikkei 225 futures are available for trading on the Osaka Securities Exchange (OSE), the Singapore Exchange (SGX), and the Chicago Mercantile Exchange (CME). It is available for trading on CME’s Globex platform from Sunday 5:00 p.m. to Friday 4:00 p.m. CT, with an hour break between 4:00 p.m. and 5:00 p.m. CT each day.

There are two contract types: the Yen-quoted contract and the Dollar-quoted contract. One contract unit of the dollar-based Nikkei 225 futures is equal to the index’s value multiplied by $5, while that of the yen-based contract is ¥500 multiplied by the index’s value.

The contracts are divided into four quarters (March, June, September, and December), with 12 quarters and three additional December contracts listed per month. Trading typically closes at 5:00 p.m. ET on the Thursday before the contract month’s second Friday. BTIC trading closes at 3:00 p.m. Tokyo time (1:00 a.m./2:00 a.m. ET) on the Thursday before the contract month’s second Friday, and contracts are financially settled upon expiration.

How do you start trading Nikkei 225 futures?

Nikkei 225 futures can be traded through any futures broker who can provide access to the Tokyo Exchange or the CME platform, where the contract is traded. Many European and American brokers do not provide access to Asian markets, but Interactive Brokers (IB) does. To begin trading this contract, you must first open an account with the right broker and fund it. Because futures are leveraged products, you do not need a large amount of capital to open a position. What you require is the required margin to open a position.

Alternatively, some CFD brokers, such as IG, offer a CFD (Contract for Difference) that tracks the Nikkei 225 futures.

What is the Nikkei 225 trading at?

As of December 8, 2022, the Nikkei 225 futures is trading at 27,665. You can view the live chart at CME’s international pages.

What’s Nikkei 225 futures hour?

On the CME Globex platform, Nikkei 225 futures contracts trade from Sunday – Friday 6:00 p.m. – 5:00 p.m. ET (5:00 p.m. – 4:00 p.m. CT). There is a one-hour break each day beginning at 5:00 p.m. ET (4:00 p.m. CT).

For BTIC, the trading schedule is as follows: Sunday to Friday, from 6:00 p.m. ET – 3:00 p.m. Tokyo time (1:00 a.m./2:00 a.m. ET) and Monday – Friday Noon to 5:00 p.m. ET.

Where can I find trading charts?

You can make use of charting services from your trading platform. However, if your platform does not offer it, you can easily make use of advanced charting software like TradingView, which offers free charts and the ability to create your own technical indicator. Although TradingView is free to use, if you want access to pro features you will need to subscribe to that. Barcharts also offer free charts with some limited features. Yahoo Finance and Marketwatch are other places you can get the Nikkei Chart.

What are the trading symbols for Nikkei 225 futures?

The trading symbol and product codes for the dollar-quoted Nikkei 225 futures on CME are as follows:

  • CME Globex: NKD
  • CME ClearPort: NK
  • Clearing: NK
  • BTIC: NKT

For the yen-quoted Nikkei 225 futures on CME, the trading symbols/product codes are:

  • CME Globex: NIY
  • CME ClearPort: N1
  • Clearing: N1
  • BTIC: NIT

What is the specification for the Nikkei 225 futures contract?

The underlying asset is the Nikkei 225 Index, and the trading symbol is NKD for the dollar-quoted contract and NIY for the yen-quoted contract.

One contract unit of the dollar-based Nikkei 225 futures is equal to the index’s value multiplied by $5, while that of the yen-based contract is ¥500 multiplied by the index’s value. The price is quoted in USD and cents per index point for the dollar-quoted contract and in Japanese yen per index point for the yen-quoted contract. The minimum fluctuation for both is 5.00 per index point, which translates to a tick size of $25 per contract or ¥2,500 per contract, as the case may be.

The contracts are divided into four quarters (March, June, September, and December), with 12 quarters and three additional December contracts listed per month. Trading typically closes at 5:00 p.m. ET on the Thursday before the contract month’s second Friday. BTIC trading closes at 3:00 p.m. Tokyo time (1:00 a.m./2:00 a.m. ET) on Thursday before the contract month’s second Friday, and contracts are financially settled.

Why should you start trading Nikkei 225 futures?

Japan is the world’s third-largest economy, trailing only China and the United States. It also houses some of the world’s most powerful corporations, including Honda Motor Co. and Sony Group Corp. The Nikkei 225 futures have good liquidity and are a good choice if you want to diversify your investment portfolio. You can also use it to hedge your exposure in the Japanese equity market or simply speculate on the direction of the Nikkei index and profit from its high volatility.

What is the contract size?

One contract unit of the dollar-based Nikkei 225 futures is equal to the index’s value multiplied by $5, while that of the yen-based contract is ¥500 multiplied by the index’s value. Given the index’s value of 27,665, as of writing, this translates to a total worth of $138,325 for the dollar-quoted contract and ¥13,832,500 for the yen-quoted contract.

What is the tick size?

The tick size of the full contract is $25 per contract for the dollar-quoted contract and ¥2,500 per contract for the yen-quoted contract.

What is the minimum price fluctuation for Nikkei 225 futures?

The minimum fluctuation is 5.00 per index point.

Are there any ETFs?

Yes, many ETFs track the performance of the Nikkei 225 futures. These are some of them:

  • Xtrackers MSCI Japan Hedged Equity ETF (DBJP)
  • iShares Currency Hedged MSCI Japan ETF (HEWJ)
  • WisdomTree Japan Hedged Equity Fund (DXJ)
  • Invesco JPX-Nikkei 400 UCITS ETF
  • Amundi JPX Nikkei 400 UCITS ETF
  • Amundi ETF JPX Nikkei 400 UCITS

What factors affect Nikkei 225 prices?

Many factors can influence Nikkei 225 futures prices. The index is influenced by the performance of the local currency (yen). Furthermore, major news releases in Asia can have a significant impact on the contract’s movement. Because Japan is an export-dependent country, a drop in the number of goods exported will have an impact on the country’s businesses, lowering the index.

Japanese government policies can also affect the index’s price, while earnings reports from the index’s individual components can cause prices to rise or fall.

Furthermore, Japan is prone to natural disasters and has been seen to cause a stir in the market –responsible for some market lows.

What is the all-time high for Nikkei 225 futures?

Based on the TradingView chart for Nikkei 225 index, the market hit its all-time high in December 1989, when it reached an intra-day high of 38,957.

What are the biggest risks in trading Nikkei 225 futures?

The greatest risk associated with trading the Nikkei 225 futures is market volatility. Given that it is a leveraged product, adverse index price movements can result in significant losses. For example, if you are trading with a 20x leverage, every 1% loss in the market will result in a 20% loss in your account balance. In contrast, an 4% drop in market price will result in your account being folded because you will have less than 20% margin maintenance remaining.

What is the settlement method?

The contract is financially settled

What is the settlement procedure?

The final settlement price is based on the special opening quote of the Nikkei Stock Average, rounded to the closest 1/100th of an index point, used to settle the Nikkei Stock Average Futures at the Osaka Securities Exchange. The opening of the second Friday of the contract month will often serve as the basis for this value.

What is the block minimum for Nikkei 225 futures?

50 contracts for BTIC on Nikkei Stock Average Futures

What is the difference between Nikkei 225 futures and the CFD product for Nikkei 225?

Nikkei 225 futures contracts have expiry dates, while the CFD counterparts have expiry dates.

Which forex pair is the same as Nikkei 225 futures

Nikkei 225 CFD

What are some important dates for this market?

Some of the important dates include:

  • September 7, 1950, when the index calculation began.
  • December 29, 1989, when the index reaches its all-time high.

What is the highest Nikkei 225 has ever been — its all-time high?

The highest level the index ever got was 38,957 in December 1989.

What is the lowest Nikkei 225 has ever been — its all-time low?

According to a chart from TradingView, the index reached an all-time low of 6850 on March 2, 2009.

Conclusion

You can use the Nikkei 225 futures strategy to diversify your portfolio into the Japanese market, speculate on the direction of the index, or hedge your exposure in the Japanese equity market.

Similar Posts