Robert Carver: TTU: Diversification of Trading Strategies - PursuitOfEdge/podcasts GitHub Wiki
people generally have a strong pref for systems that make money every month but every now and then lose a lot, which is the opposite of trend following
realize there are known risks and unknown risks, and we can't forget/ignore that unknown risk can happen
some people add skew/kurtosis to make their equity curve more blocky and realistic, co-skewness correlation
the more fancy your risk model the more calibration you need to do, and you're mostly just capturing expected risk, not enough unexpected risk
so he prefers to just keep it simple, just looks at risk as standard deviation and corrrelation
assumes the worst e.g. what if all correlations go to 1 - how much am i able to lose?
emphasizes going for a simple risk model that is easy for you to understand so it feels better
"if you get this risk management part right, the entries/exits don't matter as much"
says how stops are written about is incorrect e.g. people usually say "don't risk more than 2%" so if you have more money, you have a bigger stop, but the market doesn't know how much money you have and doesn't care, so the smaller trader gets stopped out earlier and the bigger trader gets stopped out earlier and this is wrong, and therefore smaller traders trade more frequently
but the truth is the holding period / volatility is the market has nothing to do with how much money you have
so when setting a top it should be based on how volatile the market is and how long you want to hold it
then it gets on to the position sizing which is actually how much money you want to risk. divergent systems can risk bigger than convergent systems based on their skew of returns
he does continuous trading which means he doesn't really have a stop, but he has a target position which is implied by forecasts and if the price changes the target position then he trades from long/flat/close
when trading discretionary, he recommends just setting a stop and you can't get out of the trade until the stop is hit, which forces someone to manage the trade correctly
most pro managers have a vola target, say car analogy 50 mph that they try to hit over a number of years, and how they drive on a specific trade is just determined by the forecast, with some sort of limit
his limit is 100 mph so he would never have an expected known risk of more than 2x his long-run average target
but could go down -10% or -15% on the whole portfolio regularly
if starting a research team he would look at size, intelligence, diversity in opinions
says a good system design is like building a building, then you just have to maintain it. says these firms are too big with too many researchers
trend following is a self-fulfilling prophecy
favors sharpe ratio, skew
negative skew: relative value, skew, long/short
is worried about negative skew strategies because they have not have their big down day in the backtest
is always worried about strategies that win often, make a lot of money, but haven't had a big loss - then it must always be exposed to one
his own trading:
40 futures markets
diversification is the only free lunch
a whole bunch of assets and geographies
if he had more capital he'd have more markets
theoretically there is always a benefit in adding another market that isn't 100% correlated
his system is actually only 40% trend following
also has a carry/contango yield system
has a short bias on the VIX and european V2X - he believes being short the implied vol vs. realizable premium is a source of return, with an allocation of about 5-10%, these have about 4x the skew of the equity markets they track and if 2008 happened again it would be pretty dangerous, but he's also running carry and trend so if anything really bad happened he'd be out of the system so it's not much of a concern
when he was younger he would be more flexible with his system, but now that he is older he is more rigorous and prefers simplicity, so if he's gonna put something in this system he needs strong evidence that it's legit
test with some random data for real drawdowns
if you had a risk target of -20%, aiming for a sharpe of 0.5, it'd be about -10% drawdown, there may be 10 year periods where average drawdown is -50%, worst drawdowns are about -40% over a 10 year period about 2x risk target, if you're running a system for a few years and it goes down -40% you shouldn't panic because that's about what you should expect (WHAT?)
you really want to be a position where you can lose ALL the money you're trading, like -80% drawdown, what?
"The Predictors" - by Don Farmer
if he could pass down one thing to his children, it's optimism. he's a very optimistic person who has never regretted something in the past