Quant/Quant-Discretionary Trading Dilemma

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CPTRADER
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Quant/Quant-Discretionary Trading Dilemma

Post by CPTRADER » Fri Dec 12, 2008 5:17 pm

I have a fully developed and back-tested multi-market multi-strategy quantitative trading program that I have near 100% confidence in.

Additionally, I have a quantitative strategy with a substantial discretionary overlay, let say 70% quantitative, 30% discretionary. This “overlayâ€

7432
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Post by 7432 » Fri Dec 12, 2008 7:25 pm

my problem with increasing leverage is I've never had 100% confidence in any system, especially during a drawdown.
if you have near 100% confidence in your system you are really protected on the downside by your system's worst case scenario, so why not ratchet up the risk and swing for the fences? you know, or at least are near certain, what the long term result will be.

if you increase leverage to 3x normal and your system indicates a 65% drawdown, and that comes first, does that leave you trading the other system anyway?

why the high capital requirement? does it need at least a 1000 lot position in the 30yr bond to work?
directional futures trading should be scalable, either direction to a point. and if you are doing pairs trading the clearing house might loan you the money.

*I am assuming here that the higher capital system has better returns, lower/shorter drawdowns, otherwise it wouldn't be a dilema.

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Post by sluggo » Fri Dec 12, 2008 11:30 pm

It's an awful dilemma. "I know exactly how I'd trade if I had $80 million, but I don't quite know how to trade with $0.2 million". Perhaps you can apply the same creativity and energy toward solving the latter problem, that you already applied to the former. Now that you've solved the easy problem, perhaps you are in a better position to attack the hard problem.

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Post by orange » Sat Dec 13, 2008 12:09 am

Hi CPTRADER,

I assume that your 100% quant strategy requires high capital because it utilises large stop losses.

If so, you may want to look at brokers offering futures CFDs where you can trade mini-contracts (0.1 of a point) and micro-contracts (0.01 of a point).

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Post by CPTRADER » Sat Dec 13, 2008 3:01 am

SLuggo....are you being sarcastic or witty or both.

Why is one problem easy and the other hard.

I came here in the hope that other forum members could share some wise insights that could solve the dilemma. I trust you can do that. Please do. That would be preferred to your initial reply.

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Post by sluggo » Sat Dec 13, 2008 9:58 am

I'm providing a suggestion: return to research. Apply the same energy and focus to the question "How might I trade a small account?" that you have already applied to the question "How might I trade a very large account?"

Designing a trading plan for a very large account is easier, because you have fewer constraints. Nothing prevents you from adding 25 more instruments to the portfolio, or adding 5 more systems to the suite. Nothing prevents you from smoothing the equity curve by adding instruments and systems that are uncorrelated or negatively correlated to the current ensemble. (Some "zig" while others "zag", and when you add them together -- smoothness. Aaaah). Nothing prevents you from applying the intuitive principle "if some is good then more is better", and you can keep doing so, as much as you like, without constraint.

In the small account there are constraints. Money constraints. These translate into an inability to keep adding more and more instruments, more and more systems. Eventually you run into problems of minimum lot size. For example, suppose you've got 7 systems and 50 instruments. Suppose your betsize is 0.3% of equity on each trade. (In this case, if all systems entered all instruments on the same day, your total risk would be 0.003 x 7 x 50 = 105% of equity). At a betsize of 0.3% you'd need about $2.5 million of account equity to trade a minimum lotsize (1 futures contract) of Nymex natural gas. But if the account is smaller than $2.5 million, you have to skip the natural gas trade and forego the potential profits and diversification that it would have provided.

So, I recommend: return to research. Design your suite with small accounts in mind. This is a harder problem. Remember that you've already solved one problem (design a suite for large accounts), which ought to boost your confidence that you can solve another problem.

There is some encouraging data to report. Quite a number of professional money managers (CTAs) will accept managed accounts that are much smaller than your current minimum "high seven figures" of equity. Some will trade $500K accounts, some will trade $250K accounts, and some will trade $100K accounts. You can find them and study their track records by signing up to view www.iasg.com and www.autumngold.com and www.catranis.com and www.managedfutures.com . I think you will be encouraged to see just how many people there are, who trade accounts smaller than "high seven figures" and still get jolly nice returns. (Don't forget to add back the 2-and-20 fees to their performance reporting! 30% return after fees, was 38.3% before fees). I think you may decide, "if they can do it, so can I!".

Return to research.

I suppose I ought to mention, there is another option. If you need (let's say) $8M to trade your suite of systems, but your current capital is 2X to 4X smaller than that, then you've got $2M to $4M right now. You could invest this money with outside managers and let them grow it to $8M while you sit on the sidelines. You could divide up the money among 4 to 8 outside managers (for diversification!), open up an $0.5M managed account with each one of them, and let them do what they are good at -- running small accounts. Meanwhile, you could spend your time doing what you are good at -- figuring out how to run big accounts. If you are not interested to perform the necessary research that would lead to an optimum trading plan for small accounts, hire some people who have already done that research and created that optimum trading plan for small accounts.. It will probably take a lot less time to identify and vet external managers, than it would take to perform the necessary small account research so you could trade a small account yourself. When the outside managers have grown your capital to $8M, close the accounts and start trading the $8M yourself using the suite of trading systems you designed.

Here's a representative outside manager whose minimum managed account is $0.125M http://tinyurl.com/5o2ult

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Post by CPTRADER » Sun Dec 14, 2008 10:16 pm

Sluggo, your post is insightful in some ways but doesn't address the dilemma.

My philosophical belief is that truly robust systems work on multiple markets, multiple sectors, multiple regions and are truly a "suite of systems". It is very difficult if not impossible to achieve robustness and good risk/reward metrics with a small account size without accepting some risk-reward limitations. So perhaps some more extensive research could address this problem, perhaps, but I doubt it can be fully addressed...can you drive a car with three good tires and one flat tire....YES..but not for long. Research has led to "run-flat' tires...but even the great research that led to run-flat tires can't solve the three good tires/one flat tire dilemma

I could easily have a one-market/one strategy system....but how robust is that; how "safe" is such an approach??

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Post by sluggo » Sun Dec 14, 2008 10:25 pm

OK. Good luck / best wishes.

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Post by CPTRADER » Sun Dec 14, 2008 10:33 pm

Thanks, sluggo for sharing.

To clarify/add to my previous points. Research is never ending..... and research can at times after lots of effort surprise us in its findings.......so perhaps what I meant to say is: research is not an immediate solution to my problem...and even if it can solve my problem....who knows when it will---and will that "solution" be a full solution or just an "approximation" similar to the 70-30 quant/discretionary system - leading to its own inherent risks/weaknesses?

Thanks again....which I should have said in my previous post. Your posts always inspire thinking...which is VERY GOOD. Thank you. Merry Christmas!

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Post by dave3076 » Sun Dec 14, 2008 11:40 pm

I can tell you how i steered around the dilemma you are in. Firstly i tried to filter all high volatility trades (high volatility in this instance meaning...too high for MY particular starting account), with a volatility filter, thereby shrinking my portfolio. I found it was a reasonable way to begin trading a six figure account. It was a sacrifice though, because it's not what i wanted to do or what i liked to do....it was what i HAD to do. The reason being, no matter how much i've "tinkered" and "tampered" with portfolio's in regard to my very very simple ultra long term trading system, i've found no substitute for force feeding it every market i can get down its neck!. I personally would only trade what I was comfortable with. One way or the other you are going to have to make a sacrifice. Now all you need to do is decide WHICH sacrifice you are going to make and with which sacrifice you are the most comfortable with. My point in highlighting that, is because someone can say "i think you should do this" or "i think you should do that", but ultimately no one but you knows which sacrifice you will be most comfortable with. It's something I, and i suspect many other's have had to do. I basically stopped dreaming of "if only i had this, or if only i had that", and take the leap. Pull the trigger as it were, or take the pain if you will!.... which ever pain you choose to take! But be sure to remember that although you are quite right in your statement that research is never ending, your life span and financial life span is! Paralysis by analysis is a horrible way to die! (or live!).
Goodluck...

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How to trade the strategy??

Post by Mats » Mon Dec 15, 2008 4:09 am

It is a problem with small accounts and diversification, i solved by by using CFD's and a subset of the All liquid portfolio in TB. I now trade a six figures account with medium risk and it works quite well.

However it very dependant on your betsize.

Good luck!

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Post by adamant » Wed Feb 18, 2009 5:14 am

Hi Mats:

May I ask what trading platform you are using?

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Trading platform

Post by Mats » Wed Feb 18, 2009 7:54 am

I use CMC Markets.

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Post by adamant » Wed Feb 18, 2009 11:03 am

Hi Mats, thanks:

Are you fully automated or do you manually place your orders?

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Fully automated

Post by Mats » Mon Mar 02, 2009 6:24 am

I am manually placing orders, CMC Markets do not have an API as i know of.

Best Regards/Mats

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