Position sizing in portolio of models/strategies?

Discussion in 'Automated Trading' started by greaterreturn, Jul 11, 2008.

  1. Folks,

    I have a home-grown platform with multiplexed strategies and time frames on multiple instruments.

    I need to add position sizing.

    On a single strategy, I know the tactic is to risk less than 1% of account per trade.

    However, is there any theory on the safe amount to trade on portfolio of strategies?

    Perhaps, that depends on a montecarlo analysis of the entire portfolio.

    It just occurred to me that if the combination of strategies yields a smooth equity curve, than a higher percentage of the account per trade may be warranted?

    Thoughts, please?

  2. monte-carlo is good.

    relatedly some people use VAR for portfolio balancing.

    might also want to look into kelly criterion, you could use monte-carlo to guage your expected return and then use kelly (or more conservatively, half-kelly) to guage your position size based on this expectation.
  3. chvid


  4. modern portfolio theory (aka efficient frontier / CAPM), monte-carlo and VAR of course all share the same limitations in that they work best for normal distributions (or in the case you use some other distribution as input to your model; it is still alimiation when the market doesn't match your distribution). iow beware models and fat tails. probably superfluous to say but important none the less.
  5. chvid


    tradelink - agreed - i don't use this stuff myself systematically

    I look at my models / strategies - try to figure out how they behave at extremes and make sure I have a portfolio of system with reasonable diversification.

    Also - you optimization gets complicated as you start to take in account minimum "trade lot size" and transaction costs.
  6. chvid - totally with ya. have a good weekend.