Discretionary trading

[Kenneth K]

So, in summary,

• trading 100% in IWM maximizes your expected return and can be considered a fully diversified holding
• trading 100% in GDX reduces your potential gain as well as introduces additional volatility to your portfolio
• trading 73% in IWM and 27% in GDX minimizes your portfolio volatility, at the cost of some expected return

That may be accurate if you replace 'trading' with the word 'holding'. Holding the different portfolios over time, you may end up with such risk-return characteristics. But when it comes to 'trading', none of that matters. None of those parameters come into material effect during the very short trading horizon of the Robots. Short term trading yields portfolios with totally altered risk-return characteristics.

What is efficient for a buy and hold index portfolio, is not necessary true for an actively traded portfolio. You cannot compare apple and oranges, eventhough they are both fruits and delicious.


Trying to pinpoint an optimal mix of Robot based trading in IWM/GLD is an exercise in futility. There will be periods when one specific mix is optimal. And that optimal mix is optimal for that particular period, in direct relation to the market movement in IWM and GLD during that particular time. And naturally, that will simply fluctuate over time.


I see a lot of effort is expended on slicing and dicing the Robot signals to get the most out of it. From my limited experience in the business, I would venture to guess that there is inherent risk in over optimizing within a very small data set. The nature of the market is change, eventhough very often, and ironically, the more things change, the more they stay the same. There is an inherent risk that what works perfectly for the last three years, may not work as well in the next three years. The key is the robustness of the algorithm.

It appears that the ROBOT methology of combining a trend following component with a mean reversion component is a very robust method that will withstood the test of different market conditions, with minor retuning over time. If people over optimize it for a very narrow trading period, the result may be counter productive.


As always, best of luck to everyone.

[Pascal]

That may be accurate if you replace 'trading' with the word 'holding'. Holding the different portfolios over time, you may end up with such risk-return characteristics. But when it comes to 'trading', none of that matters. None of those parameters come into material effect during the very short trading horizon of the Robots. Short term trading yields portfolios with totally altered risk-return characteristics.

What is efficient for a buy and hold index portfolio, is not necessary true for an actively traded portfolio. You cannot compare apple and oranges, eventhough they are both fruits and delicious.


Trying to pinpoint an optimal mix of Robot based trading in IWM/GLD is an exercise in futility. There will be periods when one specific mix is optimal. And that optimal mix is optimal for that particular period, in direct relation to the market movement in IWM and GLD during that particular time. And naturally, that will simply fluctuate over time.


I see a lot of effort is expended on slicing and dicing the Robot signals to get the most out of it. From my limited experience in the business, I would venture to guess that there is inherent risk in over optimizing within a very small data set. The nature of the market is change, eventhough very often, and ironically, the more things change, the more they stay the same. There is an inherent risk that what works perfectly for the last three years, may not work as well in the next three years. The key is the robustness of the algorithm.

It appears that the ROBOT methology of combining a trend following component with a mean reversion component is a very robust method that will withstood the test of different market conditions, with minor retuning over time. If people over optimize it for a very narrow trading period, the result may be counter productive.


As always, best of luck to everyone.

I agree with you Kenneth.

What Paul's excellent work implies is that IWM B/H makes sure that you move with everybody else and at the same speed. This means that if everybody else jumps off the cliff, you are sure to be with them. This means that the implied drawdowns for both IWM and GDX are pretty bad in buy and hold situations (shown below). This means that market diversification will not prevent bankrupcy when the whole market sinks.

The only way to avoid that is to start trading them. Then, the implied IWM/GDX balance will have more to do about the type of trading strategy we use on each instrument and on their combination.

For example, the IWM/GDX combination would be different when trading the robots than when trading a 50/200MA crossover strategy.



Pascal

[grems8544]

What is efficient for a buy and hold index portfolio, is not necessary true for an actively traded portfolio.

Kenneth,

I agree with you on this point.

The concept of bounding is implicit in my posting; my lookback was of ~100d or so. If the results here become the boundary of expectations in the present market climate, and if further risk management (entry at 1/3 RR, stops based on pivots, etc.) gives us the suggestion that we will be bounded by the "worse-case" results presented (e.g., risk management improves performance and/or reduces risk), then I think we can have a reasonable expectation of outperforming the boundary going forward.

My conclusions on allocation were simply to suggest that there is an allocation which represents, in the present market climate, a configuration that reduces volatility of an entire portfolio that is comprised of two trading instruments. I think we can agree that if holding 100% IWM, we have a reasonable expectation that the volatility will be lower than holding 100% GDX. If the last 100d of actual returns and volatility represents the next few days/weeks (forward looking) of expected returns and expected volatility, then I think my conclusions are not too far from the mark, independent of whether you are holding IWM, GDX, or a mixture of both.

Kind regards,

pgd