You constantly engage in unprovoked attacks. You have been proven wrong several times, especially in the case of your false claim that portfolio theory involves uncorrelated assets. That was for laughs. Why don't you post some trades in advance just for people to see that you have what it takes? Here is a trade of mine: http://www.elitetrader.com/vb/showthread.php?s=&threadid=223225&perpage=6&highlight=qqq&pagenumber=1 http://www.elitetrader.com/vb/showthread.php?s=&postid=3231356&highlight=qqq#post3231356 I am not interested in graphical images that can be manipulated with freeware. Post your calls here. Show that you can take responsibility. ...and stop your uprovoked attacks.
Pretty weak Bill. Pretty weak. I provide a short track record from a broker a majority of people here use (its pretty much impossible to doctor that FYI), and you call it BS. Kind of a typical troll reponse, don't you think? Per the live trades, well, I have a posting history since 2004. There's some trades in there. That, and today I have nearly 85 equities positions, 8 options positions and 4 futures positions currently open. This is called a portfolio Bill. You do know that a lot of pros trade a large amount of various products, right? It's got a lot to do with portfolio theory, something you apparently have no knowledge of as I have yet to understand how you manage your plethora of systems. I think I'm starting to understand where you're coming from, and, after all that, you're just not worth it anymore. You're not a professional trader nor a fund manager, you're a hobbyist who makes some index trades here and there. Nothing wrong with that, hopefully you've made some money over the years.
Just curious what your risk threshold was. I'm pretty risk averse in general. I do some longer term trading, but, I have yet to build a decent long term model that isn't subject to occasional directional risk. The returns are okay over a 10-20 year period, but, the drawdowns during 2000 and 2008 are a bit much IMO. Definetly something I am still researching actively. Per the angel, its tougher than one might think, even with a decent track record. I live away from the trading centers and I certainly value my privacy and my free time...
I have had good success over the years with the simpleminded strategy of buying high dividend stocks with sustainable payout ratios. Of course you want to make sure the tide is rising.
Thank you Mike for coming to ET to tell us that there is nothing wrong with being a non-pro trader. We appreciate that. It is really a relief. For a moment I thought ET was for heavy duty pros like you who do portfolio theory with uncorrelated assets only. Now I know there is room for "hobbyists" like us. The only thing is that we also build portfolios with correlated assets Mike. I hope you will excuse us for that. Take care Mike. Please do not comment on anythign I write. Pros like you shouldn't deal with "hobbyists". OK, Mike? NO MORE UNPROVOKED ATTACKS FROM YOU.
Mike could you please elaborate on your take on the size of equity positions you put on. I understand that you do not want any one size to be a large part of your equity because of event risks (takeovers, bankruptcies, accounting fraud etc.). Also you do not want a position to be large relative to adv since so many intermediaries that see your flow, trade for their own account and can squeeze the * out of you. Do you have any rules of thumb as to how large a position in stock one should put on?
Believe it or not, my position sizing is actually fairly complex and I don't have a short answer. If you don't mind a waffling (and lengthy) response then here it is: My equity position sizing is largely due to how my system development process works. Let's assume I've managed to develop 4 equities models. Two models that rely on a mean reverting process (1 long and 1 short) and two models that rely on some sort of trend based element (1 long and 1 short). This is in an effort to have complimentary models that display low correlation to each other over some period of time. Ideally, these systems will act in unison, when the TF isn't working, the MR will be... in an ideal world of course. Nothing is ever ideal, but you get the point. So now we have 4 models with some decent stats over the last 20 years or so. Each model will have days where it just falls apart, if one was trading an MR long model yesterday for example, it would have lost quite a bit until maybe the last hour or so, and potentially much more if exposure wasn't controlled. Each model will also have days where one position just kills it (I don't use stops). Say you're long and the co. gets sued; I've had positions move 30% against me in a matter of minutes. So those are the two problem scenarios, single product risk, and model risk. So what I'll do is assign a max position size and max model exposure limit for each model based on historical testing and a bit of common sense. So back to the 4 models, say they're allocated equally to start, at 25% each, 3% max position size for any one stock in any one model; provided volume, price and volatility will allow that. What does the combined return look like for the entire basket of models working together? Which one (or set of models) account for the worst case day/trade? What if I assign MR long 40% and MR short 10%, and make the long side max. position size 2x the short position size? What does the return dist. look like here? Did my results improve? Rinse and repeat until an acceptable risk/return ratio is found across the entire data set. So those are the initial steps in the process and they are somewhat straight forward. Next comes the interesting part, building hedging systems. Systems that one wouldn't trade on their own, but, when added to the basket of models, will allow one to increase position size and increase leverage. This has a lot to do with portfolio selection as well as common sense. Does shorting 1 ES contract for every 50K in long equity exposure make sense over the testing period? Maybe. So the end result from this round about process is that having lots of small positions is better. Spreading your equity across many products will allow one to use easy hedges (like ES for a basket of equities), and, will to some degree allow one to absorb some of that eventual single product crap as a 30% adverse move on a 2% position is not too painful, and, might not matter if other positions are working well that day. In terms of max. size of any individual position, it depends on one's portfolio and the type of order required to execute. Like you mention, ADV is a good way to go. Using a combination of ECN's, staggering orders over a time period, there are all sorts if methods one can use. I usually wait for a narrower spread and decent quotation size when an entry is hit. This does occasionally cost me, but, it really depends on what type of orders one is using.
Thank you Mike for the detailed response. As I understand it, you first allocate the risk on individual bets in each strategy. Then you calibrate a strategy risk allocation scheme that determines the position size for the portfolio of strategies. Makes sense. I also found it easier to model the specific individual returns and therefore hedge out the beta. I think of ES as its own process that you should model separately if you want to bet on it. Within the window of entry opportunity that my strategy allows I found it reasonably easy to move around 1% of adv, but as soon as I try to push towards 2% the jackals start catching my scent. Perhaps my algos are too primitive. Also if you don't think you are giving too much away, what databases do you use for your backtests?
Yeah, individual strat. first, then as a piece of the portfolio. If you're ever in the mood, Ralph Vince does a good job getting into some fairly neat portfolio management concepts: http://www.amazon.com/Mathematics-Money-Management-Analysis-Techniques/dp/0471547387 Vince is a good source IMO. My approach isn't nearly as aggressive as it could be per Vince's suggestions; I tend focus effort on keeping drawdown to a minimun rather than going after absolute return. The ES "hedge" is more of a counter mean reversion system; you are right, its best to evaluate ES as a seperate process . Can you explain your process for hedging out beta? Are you doing this intraday? You certainly don't have to explain, but PM me if you're willing to share and don't want to do so in public. Per the ADV issue, where are you routing? Are they MKT orders?
I definitely agree. Ralph Vince seems to be one of the few that has a theory for position sizing that is also useful in practice. I would also recommend the following book in addition to the one above: http://www.amazon.com/Leverage-Space-Trading-Model-Reconciling/dp/0470455950 He does not address positioning with the "never bet more than 2%" type of advice, so you need some math background to fully understand his methods. Another drawback with his books is that they could be a little hard to understand (he has a somewhat "special" language) but in the end I believe it is worth the effort.