Determining quantity of shares to trade after the long/short signal

[math_trading_coding]

I am reading about black box algorithms to determine quantity of shares to trade after the buy signal is generated.   Some are based on recent average trading volume.



In one case, it is some kind of (hybrid) step-function, with little explanation.



For example, start with V = small percentage of the avg. daily volume.

Given: A < B < C < D



If Vol doesn't meet a certain min. threshold (A), you don't trade any. (qty=0)

If Vol is between A and B, then qty = some quadratic/parabolic expression

If Vol is between B and C, then qty = linear expression (where resulting qty exceeds prev. A-B interval)

If Vol exceeds C, then qty = some very *low* constant. (Much less than the qty determined in either A-B or B-C)



1) Is this a "typical/standard" approach for determining shares to trade, or is it "curve fitting" ?    If so, does it have a name?



2) Is it common to have quadratic equation for one interval, and linear in another?    Rationale for this?



3) What could be the rationale for trading *low* quantities of something with *high* volume ?         (Not volatile enough to bother trading?  ie: Hig vol = low beta?)

  



Thanks!

[benji]

hi mtc,



usual money management is based on common sense, simple rules, or Kelly stuff. the rationale is to make your bet size proportional to the expected return of the trade and inversely proportional to the risk of the trade. in the case of this system, maybe the expected return is directly a function of Vol. if crazy Vol, the system pull the plug. look like the rules are common sense based, scaling with the edge of the trade, and with a safety net. in the classification of money management systems you'd probably classify this as a bankroll-independent/constant size type of betting. You might want to put on a small position at first because the trade a small edge/large risk. don't look for too complex explanation of all this.



hth

[math_trading_coding]

Thanks for the reply, Benji. 



1) Can you clarify [b]"scaling with the edge of the trade" ?[/b]



[i][/i] 



[i]> make your bet size proportional to the expected return of the trade and inversely proportional to the risk of the trade.[/i]



2)  Like if calculating share quantities:  using values like [b]"signal strength"[/b] in the numerator, and [b]volatility[/b] in the denominator ?



 



3) Have you ever seen [b]market cap[/b] and/or [b]price[/b] come into play with figuring share amounts?    Would these generallly be direct or inversely proportional to amt of shares to trade?  What are other common variables that affect quantity to trade? 



Thanks for the insights..

[benji]

hi mtc,




1) just bet more if you expect larger return, other things being constant.



i think you might be somewhat confused. think of the money management ( =the number of shares to trade) as something that comes as a module to your trading strategy. you have to have a strategy in the first place, with positive expected value, and this will generate buy and sell signals. before entering each trade, if you did your homework, you have estimates of the risk and the return. together with your current wealth, these are the main inputs of your money management scheme. now, to answer 2) and 3) why not, lots of things are possible it is going to depend entirely on the trading strategy itself ... if market cap comes into play into your trading strategy, it is going to be a factor in your position size, but you should be able to focus on other numbers (your distribution of expected returns) and more or less forget the rest.

[HankScorpio]

mtc,



you might wish to spend some time digesting the info in these threads:



[url=/Show%20Post.aspx?PostIDKey=16779]DD & Preserving Principal[/url]



[url=/Show%20Post.aspx?PostIDKey=65452]Diffusions with autocorrel[/url]



[url=/Show%20Post.aspx?PostIDKey=91680]kelly stuff[/url]



[url=/Show%20Post.aspx?PostIDKey=67428]Shannon[/url]



or you can do a search for "Kelly" and "Thorp".  Lots of info, especially from some of our more Senior members.

[benji]

nice list. I would also like to mention the [url=/Show%20Post.aspx?PostIDKey=52339]operation phoenix[/url] thread.