How Do You Push A Good Holding Out to Make Room for Better?

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How Do You Push A Good Holding Out to Make Room for Better?

Post by stamo » Sun Nov 15, 2009 3:45 pm

Anyone have suggestions on how they push a merely "OK" holding out of a portfolio to make room for what seems to be a much better one?

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Post by LeviF » Sun Nov 15, 2009 4:25 pm

I would start with the quantification of how you define "better" and work backwards from there.

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Post by sluggo » Sun Nov 15, 2009 4:48 pm

You may find this easier to analyze if you temporarily restrict yourself to thinking about systems that pyramid their trades. For example, suppose that in the best case (a very well-behaved and profitable trade), your system will put on a total of four units. Something resembling the Original Turtle Trading System's pyramiding rules as laid out in the WOTT book.

Now you have the flexibility to "push out" some or all units of an existing trade, in order to "make room" for some or all units of a new trade. In effect, to move units (or permissions-for-units) from one trade to another.

Maybe the finer granularity of multiple unit trades, makes decisionmaking simpler.

Paul King
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Post by Paul King » Mon Nov 16, 2009 11:33 am

As levi mentioned, it depends on what you define as a "better" position. If you believe that price movement is not predictable then any current position is just as good as any other one (assuming it's taking the same amount of open risk) and kicking one out to replace it simply generates more commission for your broker and has no effect whatsoever on your gross risk-adjusted return.

If you define lower average correlation of the entire portfolio as better, then you can simply compare the recent average correlation of your current portfolio with the portfolio as it would be if you replaced one of the positions. If it's lower then do it, if not don't. Obviously one would need some restriction on how often this replacement took place otherwise the implementation costs would completely outweigh any advantage of lower average portfolio correlation.

Note that this definition of "better" implies that scaling into positions is never a good idea if there is an alternative because an additional unit of something already in your portfolio must by definition increase the average correlation of the portfolio as a whole. Whether you are OK with this depends on what you believe to be a good approach to scaling in and/or managing a multiple-position portfolio.

Hope this helps you to think in a constructive way about the problem.


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Post by babelproofreader » Mon Nov 16, 2009 4:13 pm

Maybe some form of maximum favourable excursion analysis? If testing shows that a profitable trade that has been open for 'x' period of time normally has potential for 'y' further gains, whereas a new trade on average has potential for 'z' gains, then if z > y replace the trade, if z < y don't replace but monitor the new trade as if it had been taken and make the swap if/when the new trade y > old trade y.

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Post by rabidric » Tue Dec 15, 2009 9:27 am

This question opens up a pandora's box of extra parameter dimensionality to your models.

imho don't bother to try and build or optimize a ruleset to better fit your trade selections unless you want to enter a personal hell of event dependencies and system brittleness.

the best thing i could think of of the top of my head was simple time exits:
-shorten the time exit if you wish to "refresh" your portfolio more frequently.
-make sure your system entries work in such a way that they automatically get you back in the good stuff(buy strength etc) you just got out of if a better trade didn't supplant it.
-(lol) realize you are better off without this excrement.

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