Fully automated futures trading

[HobbyTrading]

I am mulling over the following decision. I want to increase the capital allocated to my system and had planned to do that this year around now but with no fixed date in mind. By allocating more capital to the system right now, conditioned on my knowledge of the existing positions, I am in effect increasing my 'risk on' exposure. This may be construed as a discretionary directional decision (a). However, by not increasing my capital, I am making the opposite discretionary decision i.e. not to increase my risk on exposure (b). Which is correct: (a) or (b)? Should I average in?

You mean to say that if you add cash to your trading system your current position sizes will increase? Example: current account value is 100 k USD and you add 100 k USD cash all current positions will be doubled in size? On top of that there could be instruments for which the current desired position size is between 0.25 ~ 0.5 contract and then become more than 0.5 contract, so a position gets opened.
However, overall will the system still acknowledge the total target risk setting (e.g. half Kelly, or 25% of account value, or whatever level you have set).

 

[tradrjoe]

I am mulling over the following decision. I want to increase the capital allocated to my system and had planned to do that this year around now but with no fixed date in mind. By allocating more capital to the system right now, conditioned on my knowledge of the existing positions, I am in effect increasing my 'risk on' exposure. This may be construed as a discretionary directional decision (a). However, by not increasing my capital, I am making the opposite discretionary decision i.e. not to increase my risk on exposure (b). Which is correct: (a) or (b)? Should I average in?

If you really trust in the edge of a system, delaying capital allocation is always suboptimal. In the index fund investing world, there is a saying called "time in the market is better than timing the market". If you think you have an edge in timing your own trading system, why wouldn't you add that as part of the system in the first place?

 

[globalarbtrader]

I am mulling over the following decision. I want to increase the capital allocated to my system and had planned to do that this year around now but with no fixed date in mind. By allocating more capital to the system right now, conditioned on my knowledge of the existing positions, I am in effect increasing my 'risk on' exposure. This may be construed as a discretionary directional decision (a). However, by not increasing my capital, I am making the opposite discretionary decision i.e. not to increase my risk on exposure (b). Which is correct: (a) or (b)? Should I average in?

If you really trust in the edge of a system, delaying capital allocation is always suboptimal. In the index fund investing world, there is a saying called "time in the market is better than timing the market". If you think you have an edge in timing your own trading system, why wouldn't you add that as part of the system in the first place?

This is a fascinating question, and one we used to face all the time at AHL. Of course the trite answer is to do what I do, and not have knowledge of your existing positions. Although I've managed to do this (I genuinely don't know what I have on right now) I realise this is a step too far for most people, and takes many years to develop that trust (if you look back at the early days of this journal I was posting positions all the time).

Failing that, @tradrjoe is theoretically correct, but sometimes doing what is theoretically correct may not be a good idea. If you push a lump sum increase in one go, you're going to feel regret if your system does badly immediately after that, and you will wish you had drip fed. There is a 40% to 50% chance that this will happen (depending on your system profitability and definition of 'badly'). This is a kind of risk. OK it's not the normal sort of market risk we usually think about, but it's still a risk.

On the other hand, if you drip feed and the system does well you will feel regret that you didn't drop a lump sum in. There is a 50% to 60% chance this will happen (ditto). So there is some risk here again, and it is more likely you will be dissapointed, but maybe the risk of regret about foregone profits isn't as potent for you as the risk of regret about actual losses.

In finance all the time we face trade-offs between risk and return. Are you willing to suffer the risk of a lump sum invesetment for a higher return? @tradrjoe clearly is. I would also opt for a lump sum. But the final decision depends on your own utility function.

GAT

 

[HobbyTrading]

In finance all the time we face trade-offs between risk and return. Are you willing to suffer the risk of a lump sum invesetment for a higher return? @tradrjoe clearly is. I would also opt for a lump sum. But the final decision depends on your own utility function.

For me the answer would be: "it depends". I would compare the size of the lump sum to the present account value. If the lump sum is about 50% or less of the account value I would add it indeed as one lump sum. However, if the lump sum is much larger I would prefer to split it up in a few smaller portions. Alternatively, one could add the cash as one lump sum, but reduce the risk level setting. And then, gradually over time, increase the risk level setting back to its original level.

 

[Elder]

This is a fascinating question, and one we used to face all the time at AHL. Of course the trite answer is to do what I do, and not have knowledge of your existing positions. Although I've managed to do this (I genuinely don't know what I have on right now) I realise this is a step too far for most people, and takes many years to develop that trust (if you look back at the early days of this journal I was posting positions all the time).

Failing that, @tradrjoe is theoretically correct, but sometimes doing what is theoretically correct may not be a good idea. If you push a lump sum increase in one go, you're going to feel regret if your system does badly immediately after that, and you will wish you had drip fed. There is a 40% to 50% chance that this will happen (depending on your system profitability and definition of 'badly'). This is a kind of risk. OK it's not the normal sort of market risk we usually think about, but it's still a risk.

On the other hand, if you drip feed and the system does well you will feel regret that you didn't drop a lump sum in. There is a 50% to 60% chance this will happen (ditto). So there is some risk here again, and it is more likely you will be dissapointed, but maybe the risk of regret about foregone profits isn't as potent for you as the risk of regret about actual losses.

In finance all the time we face trade-offs between risk and return. Are you willing to suffer the risk of a lump sum invesetment for a higher return? @tradrjoe clearly is. I would also opt for a lump sum. But the final decision depends on your own utility function.

GAT

This is the sort of scientific analysis I was fishing for. I hadn't quite equated the 'risk of disappointment' with the 1 - edge of the system, which seems right. The complicating factor is that I also track signals (forecasts) and some of the risk on is at maximum signal strength which by definition can only go down. More knowledge to muddy the systematic approach. However my conclusion from all the contributions, for which I am thankful, is as the system has been put in place to remove decisions based on personal utility (and the biases they cause) is to use this risk of disappointment equation in determining my decision, despite my knowledge, and go all in. Caveat: That's what I want to do, but as I am in charge of executing this decision I probably won't follow this conclusion to the word. Where are our robot overlords when you need them most?

 

[HobbyTrading]

Caveat: That's what I want to do, but as I am in charge of executing this decision I probably won't follow this conclusion to the word. Where are our robot overlords when you need them most?

I recognize this sentiment very well. I have been struggling with this as well.

Recently I did something similar: for a while I wanted to increase the allocated capital by about 50~100% but was always holding back on the execution of this decision. Then came the corona-virus along and volatility of quite a number of instruments and in multiple asset classes went up. Making my system scale down on open positions, due to the increased volatility/risk per contract. I waited a couple of days, or about one week. Once the volatility didn't increase any further, and things started to settle down a bit (volatility-wise) I took the jump. The position sizes are still relatively low, compared to the pre-corona virus period. So I considered "the jump" as less risky at this moment. Time will tell whether I did the right thing, or whether I still jumped at the wrong moment.

 

[globalarbtrader]

I recognize this sentiment very well. I have been struggling with this as well.

Recently I did something similar: for a while I wanted to increase the allocated capital by about 50~100% but was always holding back on the execution of this decision. Then came the corona-virus along and volatility of quite a number of instruments and in multiple asset classes went up. Making my system scale down on open positions, due to the increased volatility/risk per contract. I waited a couple of days, or about one week. Once the volatility didn't increase any further, and things started to settle down a bit (volatility-wise) I took the jump. The position sizes are still relatively low, compared to the pre-corona virus period. So I considered "the jump" as less risky at this moment. Time will tell whether I did the right thing, or whether I still jumped at the wrong moment.

One further thing to think about is transaction costs. Doing the way you did, you basically sold stuff, then bought some of it back. Abstracting away from what the prices do, you've definitely wasted money on commissions and spreads.

In this situation I would set my system not to trade, and then implement the increased capital allocation. This increases my theoretical optimal position. Then I'd basically watch the optimal vs actual positions; when the optimal had come down enough so it matched the actual I'd allow the market to start trading. If it didn't look like this was happening (maybe the signal is fighting the vol) I'd turn the market on early and let the adjustment happen.

There are more elegant ways of dealing with this problem, but if you have a feel for how your system handles risk this works quite well.

GAT

 

[HobbyTrading]

In case I would have anticipated the increase in volatility I could indeed have done that approach. That would indeed have prevented positions from first being reduced in size and then being expanded again. But, I did not anticipate all this to happen....

 

[globalarbtrader]

In case I would have anticipated the increase in volatility I could indeed have done that approach. That would indeed have prevented positions from first being reduced in size and then being expanded again. But, I did not anticipate all this to happen....

With experience you will learn young paduwan

GAT

 

[Elder]

With experience you will learn young paduwan

GAT

So this raises another question. Which Star Wars character would you trust most with your money? Yoda is clearly high on the list (Jabba and Han Solo not so much). However, I would probably give most of my money to R2D2.