South American (Latin America) Trading Strategies (ILF Strategy Backtest)
Last Updated on March 8, 2023
It is now simpler to diversify your investment portfolio into other economies thanks to increased global web connectivity and the opening of many regions’ financial systems to the investing globe. You can diversify your portfolio using the Latin American markets. But what are South American trading strategies?
Exposure to the South American financial markets can be achieved in a variety of ways. Through international brokers like Interactive Brokers, you can trade Latin American equities directly. But an easier option is to invest in exchange-traded funds (ETFs) that track the South American markets. If you reside in the US, American Depository Receipts of South American stocks, which trade on the OTC markets are another option, and you can purchase them through your broker.
In this post, we take a look at South American trading strategies and we’ll also make a backtest of a trading strategy.
How can you trade South American markets?
You can readily access the South American (Latin America) market thanks to financial market deregulation and online trading platforms. The four typical methods are as follows:
- Exchange-traded funds (ETFs): One of the simplest ways to invest in the South American market is to buy ETFs that track their stock market indexes. These ETFs invest in stocks of native companies that are listed on the various Latin American stock exchanges, and they enable you to have a portfolio that is already diversified. Purchasing such index ETFs is significantly more affordable than attempting to build your own portfolio of South American stocks.
- Depository Receipts: You can purchase depository receipts of Latin American stocks if they are available in your country. A depositary receipt (DR) is a physical certificate that a bank issues to represent shares of a foreign corporation that are traded on a domestic stock exchange. It offers an alternative to trading on an international market and enables you to hold equity in other nations. If you reside in the US, you can purchase an American depositary receipt (ADR) of any big South American stock of choice from the OTC marketplace through your broker.
- Directly trading the stocks: Although it is more challenging than buying ADRs, you can buy and sell stocks directly on South American stock exchanges through some international online brokerages. Interactive Brokers is one broker that provides access to many stock exchanges worldwide. You may also check other brokers, such as TradeStation and E*Trade, or ask your broker if they offer such services.
- South American stock CFDs: Here is another option, but it is only good for speculation purposes. You can trade some of the Latin American biggest stocks as CFDs through a CFD broker, such as IG, eToro, and so on. If your interest is just to gain from price movements rather than own the underlying stocks, you can check out different CFD brokers to see the ones that offer Latin American stocks. This option is only good for short-term trading, not investing, as it does not offer you the ability to own the stock.
South American ETFs
These are some Latin American ETFs that trade on US exchanges:
- iShares MSCI Brazil ETF (EWZ): This ETF provides exposure to Brazilian equities by investing in the largest and most liquid companies based in the South American country. Although there are many other options available that could help you achieve your portfolio objectives, EWZ is a respectable choice if you are looking to load up on Brazil.
- iShares Latin America 40 ETF (ILF): With Brazil, Mexico, and Chile accounting for the majority of holdings, this ETF provides broad exposure to the expanding Latin American area. You can use it for long-term investment because of this focus on rapidly emerging nations that are occasionally overlooked by other emerging market ETFs, but it is also good for short-term trading.
- Franklin FTSE Latin America ETF (FLLA): This ETF tracks an index of large and mid-sized firms in Brazil, Chile, Colombia, Mexico, and Peru. For a very affordable price, FLLA offers exposure to some of the biggest economies in Latin America that are well-diversified. However, despite being introduced in 2018, FLLA has not yet attracted a sizable amount of assets or liquidity.
- Global X MSCI Argentina ETF (ARGT): This ETF provides exposure to Argentinian stocks by investing in companies based in the South American country. ARGT is one of the only options for investors looking to make a pure play in the Argentine market. If you want to load up on Argentina, ARGT is your guy, but note that the fund may be highly volatile.
How many South American markets can you trade?
There are many stock exchanges in South America, as virtually every country has its own stock exchange. However, the major ones are in Brazil, Argentina, Peru, Chile, and Colombia. Depending on the vehicle you choose, you can gain exposure to most of the major markets in the South American continent.
ETFs are your best bet if you want exposure to most of the major markets in the region, and they offer you an already diversified portfolio. But if you want to trade individual stocks, you can Interactive Brokers to know the exchanges they offer access to in the region.
What are the biggest South American markets?
Brazil is the biggest market in the South American region and has the biggest single stock exchange in the region — Brazil Stock Market (BOVESPA). Other big ones are the Buenos Aires Stock Exchange (Argentina), and Bolsa de Valores de Montevideo in Uruguay.
However, the Mercado Integrado Latinoamericano, more commonly known as MILA, integrates the stock exchange markets of Chile, Colombia, Mexico, and Peru — the Lima Stock Exchange, the Santiago Stock Exchange, and the Colombia Stock Exchange.
The integration, which aims to develop the capital market to give investors a greater supply of securities, has produced the largest exchange network in the region.
When are South American markets open?
South American stock exchanges open Monday through Friday from around 10:00 am Local Time (GMT-03:00), except on days that are national holidays. Each nation keeps its own holiday calendar.
When is the South American trading session (GMT)?
Since the South American region does not have a single stock exchange, the exact trading hours will depend on the exchanges you are interested in. The Brazilian market, which typically has the longest trading session, trades between 1:00 pm GMT and 8:55 pm GMT.
Can you trade South American pairs?
Yes, you can trade South American currencies against the USD or EUR. Such currency pairs are considered exotic pairs. Examples include USD/BRL and USD/ARS.
South American (Latin America) trading strategies backtest
Let’s look at a South American trading strategy backtest with trading rules, settings, and historical performance. We backtest the ETF with the ticker code ILF (see description further up in the article).
The equity curve below has two parameters for entry: one seasonal filter and one oscillating indicator. For exit we use a simple strength indicator:
As you can see, the results are pretty good. The 230 trades have an average of 0.72% per trade, the win rate is 67%, max drawdown is only 13%, and profit factor is 2.3.
Do you want to know the code and the trading rules? We sell it together with about 200 other strategies as a package:
List of trading strategies
We have written over 1200 articles on this blog since we started in 2012. Many articles contain specific trading rules that can be backtested for profitability and performance metrics.
The trading rules are compiled into a package where you can purchase all of them (recommended) or just a few of your choice. We have hundreds of trading ideas in the compilation.
The strategies are taken from our landing page of profitable trading systems.
The strategies also come with logic in plain English (plain English is for Python trading and backtesting).
For a list of the strategies we have made, please click on the green banner:
These strategies must not be misunderstood for the premium strategies that we charge a fee for: