Hi fullautotrading,
could you please comment on the tendency toward loss of the profit / blue line that is displayed in the figure?
I would expect that the profit/blue line would display either a positive drift
or an horizontal drift with larger or more frequent peaks toward positive values.
Also I would expect that the height of the peaks would increase as the use of the margin increases. Instead it seems that the profit line is not altered by the amount of capital invested?
If we look at the Unrealized Gain and Unrealized Loss lines their spread increases over time. Which makes sense in terms of an increase in the number of open games. This does not seem to impact on the profit line behavior.
Do you have any explanation for this phenomena?
Thanks!
Hi AItrader
I think that the timespan we are looking at (a few weeks) is clearly "too short" to make evident the macro phenomena you mention. Especially because the variance itself of the underlying price trajectories is large, and that may definitely "mask" them on a single "realization" (a sample path) and relatively short timespan.
In general terms, we have the PNL (blue line) which can be seen as follows:
PNL = (G + L) + Unr
What here is "drifting" is the part (G + L). The other part, the Unr, depends on:
- Price curves (usually the more volatile they are, the higher would be the Unr)
- Size and direction of orders used to trade
We do not have, obviously, control on the price trajectories, and what we can do is to intervene on the order sizes and order directions (buy/sell), in order to fight the growth of the Unr, so that, in the meantime, the (G + L) can work steadily "pulling up" the PNL.
The Unr somehow acts as a (significant) "random component" which (unavoidably) comes to "disturb" (or, actually, actively "fight"), mostly downward (because the positive scalps are closed and go in the Gain component), the drift we establish.
It's pretty analogous to when you generate a GBM with a given drift. Irrelevant of the its amount, you can of course still be pulled "down" (or further up, in that case) by the accidental component over a given timespan. (This is more evident when the volatility is high.) In our case, the effect is even more marked on the downside because essentially the Unr is (practically) always negative. Clearly the drift will still be "acting" in statistical terms, but you might not be able to "see" it in a given realization or on a limited timespan (that is why I plot the <b>"G-L" curve</b> as strong visual aid to the manager about the scalping progress).
See for instance this picture:
linked from
this page; or this picture:
from
this</a> page
In general, larger is the volatility, more you can deviate from the avg behavior.
Clearly, just as the so called
Kelly criterion suggests, it's not enough that you have something (some advantage) working in your favor (for instance a probability, or a drift, or whatever) but it also necessary to keep under check the rate of growth of the accidental component (Unr), to avoid "blowing up" before the effects of the "advantage" start have significance.
The fact that the PNL has remained almost flat here, still while we are heavily investing in metals is a positive thing.
Imagine what we would have if we had not scalped away those 30K of the "G-L" (denoting the sum of the G, L components).
Those would "show" in the PNL, and it would be way below -30K. So the "G-L" is actual $$$ that we do have made. The fact that the
PNL can be "above or under the water", is somehow accidental, depending on volatility, order sizes, etc. (and somehow immaterial once we accepts this logic), especially when starting up a session.
It depends on how much we invest of the available $$$ and how much volatility have the instruments.
In the long term the objective is obviously to pull up the PNL, which from a certain point on, will possibly remain "above the water" (but clearly always with fluctuations), except for possible periods of "strong investment", where the Unr can even pull it down again.
Clearly, we want to keep under check the Unr (and that is the job of the "scalping/hedging game"), so that we allow some new investments, but hopefully it does not escape from our control, so that the drift can keep working.
