While new simulations are running on strategy variations, i would like to review the work hastily done during these few days and maybe comment by one the various metrics. In practice, all the various contributions and interesting discussion have gradually lead to the creation of some functionalities for a better folio management and understanding of folio dynamics. These have involved "correlation", "speed", "directionality" and other concepts which is probably useful now to revise accurately, to make sure everything makes sense and correct possible errors. This is a picture of the new window to monitor the folio. It shows the various metrics for all instruments and all the representations are updated <b>realtime</b> (with charts constantly changing; charts are also movable and resizable by using mouse left and right button). I think i will call it something like <b>"folio monitor"</b> (the text label now is "folio view", but i think i will change it). Or maybe you can suggest some more interesting name ?? ;-)) Next, we will review one by one the various metrics. I am sure you will have some new ideas... Tom <img src="http://www.elitetrader.com/vb/attachment.php?s=&postid=3192931" width="1400" />
i was also thinking about the "correlation chart" (this also is updated realtime)... somehow, on the spot it has come natural to make brighter the higher values. But i was thinking it might also be useful to have the opposite option, that is to highlight the lowest (non null) values. I will probably add a checkbox to have the alternate representation... Tom <img src="http://www.elitetrader.com/vb/attachment.php?s=&postid=3192934" />
Hi Tom What about an option allowing the user to chose the range of correlation levels he wants to highlight? (may be also choose the color?) Ie I want to see in yellow all correlation between (-0.3 and + 0.3) and see in dark blue all the others.
Hi unco, that is a beautiful idea! ;-) Here is a first experiment ( abs corr <= 0.2 ) : <img src="http://www.elitetrader.com/vb/attachment.php?s=&postid=3192944" /> I am going to add this feature. ) Tom
Tom, Consider how Delta Analysis of your base folio can be used to dynamically adjust your algo trading scheme. For Hedging a position it may make sense to open an opposite position with a closely correlated instrument ranked by speed. After you close a scalp, instead of opening a new position with the same instrument... analyze and switch to the instrument that keeps your folio balanced / diversified. If an instrument is moving significantly slower than the folio average you may want to drop the instrument from the current trade set. If your always in trading the same instruments you inevitably experience draw down. If you are able to switch the instrument sets dynamically based on high probability conditions you may achieve better results.
Hi PocketChange, How would you then define a balanced/diversified folio? According to correlation too? Thanks
Off the cuff: Starting Base Folio of 5 instruments: instrument ES ES 1 CL CL .27 1 EUR EUR .15 .39 1 ZF ZF -.52 -.52 -.52 1 CAD CAD .33 .45 .58 -.7 1 Add up the correlation metrics and subtract 5 = -0.09 If you want to maintain a diversified non correlated folio you need a large negative number. If the algo is tuned to trade correlated instruments you need a large positive number. For this case of 5 instruments your scale is +/- 10. When your ready to open a new trade scan the correlation table and select the best instrument for the algo. You should be able to rank the instruments based on correlation and speed metrics to the folio. If CAD closes you may not want to reopen because large correlation .33, .45, .58, -7. You may consider replacing with AC AC ES CL EUR ZF -.79, -.79, -89, -.68 This would result in a 5 instrument folio with a -3.9 correlation index. If you are drawn down and want to hedge against a scaled up CL position you are holding consider an HG (.52) and/or CAD (.45) counter play.
Seems like a good idea to use with the automatic folio creator. Let's say we have 20 tradable instruments, then we pick up 5 instruments to start trading based on correlations, then the bot will automatically adjust which instruments are traded using this metric and automatically adjust the folio. Would be good to be able to change the number of instruments so we can increase/decrease the risk we're willing to take and also have the option to force to choose some of the instruments (let's say we always want to trade CL). Might even be possible to add different metrics in the future to have a different way to balance the folio.
Right Pocketchange. I believe that, having the folio under watch, one can take many meaningful discretionary decisions on folio management, based on all the various performance indicators and correlations. As said, let's take a look one by one, and maybe let's choose some more meaningful names for them. The first one, <b>PNL</b>, doesn't need many words. It's just the PNL of each instrument. It's just nice to have a global view of what is going on. Let's focus on the second one "PNL_MDD_Ratio" (we need to find a better label!). This is the ratio <b>PNL / | max drawdown |</b> It expresses somehow the efficiency of the strategy for that instrument. It's <b>multiplied by 100K</b>. So it can be interpreted as the <b>PNL for each 100K of max drawdown ever seen</b>. I think i should either modify this one or add another metric, probably more useful for interpretation, where the numerator is, for instance, the <b>dayly avg PNL</b> (just in case some instrument may be added later and have run for less time). It's a very meaningful index for me. Normally, i call this (second) metric <b>"efficiency" (of the strategy)</b>. It expresses somehow how well we are able to make work our "investments" (a sort of Calmar type ratio, after all). Or we should probably say, that this view expresses <b>how well the strategy is working</b> for each instrument (<b>relative to the max risk, or investment</b>). For instance, the <b>absolute contributions</b> of ZB, ZN to the PNL are very small (so they would have very low columns in the PNL chart), but here they do shine, because also <b>the risk was small</b> for these instruments! So, <b>relatively</b> speaking they are being very <b>"efficient"</b> (that is using in an efficient way the money they have absorbed for trading). And, possibly, we do want a folio filled with "efficient" instruments! ;-)) Tom <img src="http://www.elitetrader.com/vb/attachment.php?s=&postid=3193288" width="1200" />