|PDF Title :||Systematic Trading|
|Total Page :||326 Pages|
|PDF Size :||1.7 MB|
|PDF Link :||Available|
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Systematic Trading: a unique new method for designing trading and investing systems – Book
With predetermined trading capital of $250,000 you need to determine how much of that you are willing to put at risk; your percentage volatility target. As I said in chapter nine, ‘Volatility targeting’, this is a matter of determining your achievable performance, inferring from that a safe level of risk to take, and checking you are comfortable with the likely levels of losses.
You’ll be running a reasonably diversified system, with two trading rules drawn from different styles, and six instruments from different asset classes. When I back-tested this system using out-of-sample bootstrapping to ensure a conservative result, I got a Sharpe ratio (SR) after costs of 0.53. Using table 14 (page 90) suggests that about 75% of this is achievable, for an SR of 0.40.
There is a mixture of positive and negative skew trading rules and 90% of the portfolio is in relatively benign assets, with only 10% in the potentially negative skew V2TX volatility future. I’m happy to assume this is a slightly positive zero skew system, which the backtest confirms. From the achievable Sharpe ratio 0.4 rows, column A, of table 25 (page 147), you would get a 20% volatility target and hence an annualized cash volatility target of $250,000 × 0.20 = $50,000.
This is slightly lower than the level I run my own system at; I assume you’re also comfortable with the potential pain of a 20% target, and with leveraged futures achieving the risk won’t be an issue. With this relatively high volatility target you’ll be checking your account value, and adjusting your risk, every day.
Systematic Trading: a unique new method for designing trading and investing systems PDF
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