I was looking into trying to reduce market noise for strategy development and I read the best way to do that is to create a synthetic index market, such as (Gold + Silver + Platinum). In your guys opinion what do you think the best formula for creating this market? its not as simple as Gold + Silver + platinum due to the way they move and silver being drastically different in price.

any suggestions or pointers?

thanks

Define "market noise" and elaborate on exactly what your goals are for the synthetic product.

Mike

market noise:
the actual definition is to complex for me to try to explain but a simple example is if you take Gold and Silver and create an index and for example you have a 1min bar that goes up on GC and a 1 min SI bar that goes down on the same 1 min bar a properly scaled index should be able to take that into consideration and create a chart that is less noisy than looking at two separate charts. add three or four commodities and the less noisy it can get.

goals :
the easiest way would be to compare it to something like the S&P 500 except with a few commodities and not stocks. To combine stock its much easier but with futures you have big point value/ contract size and price to try to figure out how to properly create a synthetic market.

So my end goal would be a index where when the strategy buy's 1 contract of it, in reality its buying 1 GC 2 SI and 1 PL or what ever the current sizing would be.

so the question being how to properly create the index when it comes to commodities.

Big Mike 

Define "market noise" and elaborate on exactly what your goals are for the synthetic product. Mike

one idea might be:

NewIndex = Gold + (Silver * beta)

Big Mike 

Define "market noise" and elaborate on exactly what your goals are for the synthetic product. Mike

I've also created synthetic products, but I wouldn't say it was to eliminate noise exactly.

One reason is to actually trade the synthetic product, if it's made up of 3 other products you scale and weight them and then when a signal is produced on the synthetic you take positions in the underlying accordingly.

Is this what you are trying to accomplish? Will you take both a gold and a silver position in your example, or are you interested in using this synthetic product as some sort of "filter" where you would take only a position in one product?

Mike

it will be used as an index where if a signal is made then the underlying will be bought or sold according to the proper size.

Big Mike 

I've also created synthetic products, but I wouldn't say it was to eliminate noise exactly. One reason is to actually trade the synthetic product, if it's made up of 3 other products you scale and weight them and then when a signal is produced on the synthetic you take positions in the underlying accordingly. Is this what you are trying to accomplish? Will you take both a gold and a silver position in your example, or are you interested in using this synthetic product as some sort of "filter" where you would take only a position in one product? Mike

ausstone 

it will be used as an index where if a signal is made then the underlying will be bought or sold according to the proper size.

I cannot offer any advice, I've played with this idea but never followed thru with it in live trading due to a long list of "wish list" items that I never seem to have time to get to.

But keep us posted on your findings, because I do believe this has value.

Mike