Friday, December 3, 2021

Stay, double down, double up, and walking away decisions


What you do after a trade has been added may be as important as when the trade was initiated. There are four choices: maintaining existing positions, adding, subtracting, and walking away. 

The choices are a matter of mark-to-marketing your ideas and trade conviction. Many systematic investors will view this as an easy decision. For. discretionary trader, this process will be more complex. 

If you run a trend model that uses daily data, the model will be marked for adjustment every day, yet variations on how you mark a trade for adjustment create a wide set of choices. The simplest choice is a digital marking, if above (below) trend go long (short). The digital choice is fully invested at a predetermined position size at all times; however, there can be other variations from a digital choice. Trades can be scaled by volatility so that there is price above (below) trend against volatility that change position sizes. If the return to risk falls, positions will fall.

In the case of discretionary trading or trading that uses exogenous information, investors can think of mark-to-marketing as mark-to-information. Positions sizes and risk will change as new information concerning the trade enters the market. Because information quality varies, the mapping between position and action will be less clear. Hence, positions are not switched on and off. 

Investors should think about how decision action is updated - what is the information or factors necessary for position changes.   

No comments: