Leveraged Trading 6 – Position Adjustment
Today’s post is our sixth visit to a new book by Rob Carver, one of our favourite financial authors. The book is called Leveraged Trading.
Position adjustment
In Chapter Ten, Rob looks at position adjustment.
- Up to now, we’ve kept position sizes constant, regardless of how confident we are in our trade, or how the risk in the market changes.
Non-binary trading involves opening a larger than normal position when the signal is strong, and a smaller position when the signal is weak.
- It only makes sense with continuous trading (no stop losses).
Signal strength makes sense for both Forecasts
Rob defines a forecast as a scaled measure of how confident each trading rule is. Negative numbers mean a short position is taken. Rob ignores numbers above +20 and -20 (ie. he caps the range at +20 and floors it at -20). Rob also feels that most trading rules don’t work well at extremes. Rob’s process for calculating the forecast has four steps: The scaling factor for MAC 16,64 is 57.12, for MAC 32,128 is 38,24 and for MAC 64,256 is 25.28. When using multiple trading rules, you can weight the forecasts from each rule according to your preferences. Since we can now hold “half positions” (anything less than one, for a forecast of less than 10), if the trading size is scaled back due to early losses, a half-position won’t need to be converted down to zero. Position size is proportional to instrument risk (we divide the risk target by the instrument risk). Rob only does this when the position is off by more than 10% of the average exposure (the exposure for an instrument forecast of 10). Chapter Eleven is the last chapter in the book and looks at what comes next for someone who is confidently trading the system thus far described. The obvious next step is to add more trading rules. Alternatively, you could move away from fully systematic trading towards semi-automatic or discretionary trading. I’m much more interested in the former than the latter, and in particular in finding new sources of pre-tested rules. He presents a lot of material on semi-automatic trading, but I will skip all that. And that’s it – we’ve made it through the book. After that, we’ll move on to Systematic Trading. And when I can scrape together enough capital outside of tax shelters, I’ll have a go at implementing the system for myself. Until next time. Share this with Twitter, Pinterest, LinkedIn, Tumblr, Reddit, StumbleUpon and WhatsApp. Article credit to: https://the7circles.uk/leveraged-trading-6-position-adjustment/
Position scaling
What next?
Conclusions