Post
by sluggo » Wed Nov 24, 2010 8:01 am
How to trade a very large portfolio, which includes illiquid markets, in a huge account?
Try the following little homework assignment. First select a mechanical trading system + parameters which give a looooong average trade hold time on the very large portfolio. Something like "C" or "X" or "Z" on the attached diagrams (which I snagged from other posts on this website).
Then modify the trading system's exit code. Have the system exit 20% of its position on the day it gets the exit signal. Exit another 20% of the position the next day, exit another 20% of the position the day after that, then 20% more the following day, and exit the final 20% a day later.
For those who prefer fractions rather than percentages, exit (1/5th) on the first day, (1/5) the second day, (1/5) the third day, (1/5) the fourth day, and (1/5) the fifth day.
Set your simulated entry/exit slippage to "high", lots of slippage, lots more than you think you'll actually experience in real trading.
Now simulate the modified system on the very large portfolio. How do you like its performance? Does it make you think it might be possible to trade illiquid markets with a big account, if you're willing to adapt the way you trade?
Part II: modify the system again. Exit (1/10th) of the position at market-on-open of the first day. Exit (1/10th) of the position at market-on-close of the first day. Exit (1/10th) of the position at market-on-open of the second day. You get the idea. Simulate. Analyze results. Formulate conclusions.
Part III: modify the system again, scale-in entries to smear them across a number of days, just as you have previously smeared exits across a number of days. Simulate, analyze, etc.
Part IV: Partition the tradeables of your portfolio into two groups, the liquids and the illiquids. Modify your system's position sizing code so that when you get an entry signal in a market belonging to the "liquids" group, you take that trade at 100% of full size. But when you get an entry signal for a market in the "illiquids" group, you take that trade at X% of full size. Simulate for several values of X% -- be sure to include X=100%, X=50%, and X=5% in your trials. Analyze results. Formulate conclusions.
I am confident that an energetic and innovative trader could think up a dozen more schemes and strategems and contrivances, to code and to test.
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