tag:blogger.com,1999:blog-35364652.post8196107068458141696..comments2022-05-25T08:54:23.376-04:00Comments on Quantitative Trading: Loss aversion is not a behavioral biasErnie Chanhttp://www.blogger.com/profile/02747099358519893177noreply@blogger.comBlogger41125tag:blogger.com,1999:blog-35364652.post-31581007452280316142019-12-03T16:10:15.610-05:002019-12-03T16:10:15.610-05:00Thank you for the clarification, much appreciated....Thank you for the clarification, much appreciated.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-90523072043109556442019-12-03T13:09:25.397-05:002019-12-03T13:09:25.397-05:00Zyga,
You shouldn't average the last 250 trans...Zyga,<br />You shouldn't average the last 250 transactions. You should take the average annualized return of the strategy using calendar year. You should set some day's returns to 0 if there are no positions, when you are averaging.<br /><br />But otherwise, yes, you are correct.<br /><br />ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-74634172790656710132019-12-03T12:53:44.595-05:002019-12-03T12:53:44.595-05:00Thank you, that's very helpful. I checked the ...Thank you, that's very helpful. I checked the example on page 174 in your book Algorithmic Trading, however, it uses annualized mean and SD. Assuming I hold any position only for a single day and there are no overlapping trades, if my strategy's average return from the last e.g. 250 transactions is 1.1% and SD is 3.4%, utilizing m/s^2 tells me that I could trade with a leverage of 9.5 if I wanted to utilize the full Kelly. Is my interpretation correct?<br />ZygaAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-54621926897420332272019-12-03T07:54:01.204-05:002019-12-03T07:54:01.204-05:00Hi Zyga,
As I have written elsewhere, Kelly "...Hi Zyga,<br />As I have written elsewhere, Kelly "ratio" is unsuitable for trading, because it assumes discrete bets where you can lose the entire amount. No trader should make bets that can lose 100% (unless you are buying options)!<br /><br />Much more applicable to trading is the continuous Kelly formula (m/s^2) that I described in my books. If you use that formula, the leverage it suggests would be applicable to the maximum position size you should hold. So if you "pyramid" as you suggested, and have e.g. 5 overlapping positions, the Kelly leverage should be applied to 5*$position.<br /><br />Hope this helps.<br />ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-63647951428184445342019-12-02T21:46:49.240-05:002019-12-02T21:46:49.240-05:00Hi Ernie,
I was hoping you could point me in the ...Hi Ernie,<br /><br />I was hoping you could point me in the right direction. I have a trading system that can place trades daily at close, but holds them for one day if up or two days if down on the first day. The Kelly ratio is ~ 50% for all trades. New signal is generated if one day change is negative. Which means that if I place a trade today for 50% of my account and tomorrow the position is down, I have to keep the position open for an additional day. I should also open a new position tomorrow because I have a new signal on the same stock. Meaning the day after tomorrow I have two positions on the same stock, which are not completely independent as there is one day overlap. This situation can in fact continue for many days as long as there are consecutive down days on the same instrument. What is the right bet size for the second and subsequent positions? I feel like Kelly ratio is only good for new positions, the subsequent should be different. Any suggestion would be greatly appreciated. <br />ZygaAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-81243374367226722532019-01-06T09:56:53.201-05:002019-01-06T09:56:53.201-05:00Hi,
I am not a keen reader of proofs - but you can...Hi,<br />I am not a keen reader of proofs - but you can find many references in this excellent Wiki intro: https://en.wikipedia.org/wiki/Kalman_filter<br />ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-21174731970360004742019-01-05T22:35:18.693-05:002019-01-05T22:35:18.693-05:00Hi Ernie,
Would you please recommend references f...Hi Ernie,<br /><br />Would you please recommend references for Kalman filter proof?<br />Many thanks.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-67806608746408737482019-01-03T12:15:45.714-05:002019-01-03T12:15:45.714-05:00Hi,
Please email me for those files.
ErnieHi,<br />Please email me for those files.<br />ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-26249846289337354722019-01-03T11:45:21.492-05:002019-01-03T11:45:21.492-05:00Dear Ernie,
In www.epchan.com/book2, I cannot fin...Dear Ernie,<br /><br />In www.epchan.com/book2, I cannot find some data set, such as inputData_USDCAD_20120426 and<br />inputData_AUDUSD_20120426. Thanks.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-16433064263559661562019-01-03T06:59:20.851-05:002019-01-03T06:59:20.851-05:00Hi,
Kalman filter is a general signal processing (...Hi,<br />Kalman filter is a general signal processing (denoising, weighted moving average, weighted linear regression) technique that can be used to trade anything. So yes, we can use it to trade FX pairs. Capital allocation is determined by the hedge ratio as determined by the filter every period.<br />ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-80108746285973420122019-01-03T05:14:28.684-05:002019-01-03T05:14:28.684-05:00Hi Ernie,
Could we use Kalman filter to trade cur...Hi Ernie,<br /><br />Could we use Kalman filter to trade currency pairs?<br />How do we deal with capital allocation?<br />Many Thanks.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-23278014674175536762018-12-16T08:10:50.827-05:002018-12-16T08:10:50.827-05:00Naturally, it is because I haven't found relia...Naturally, it is because I haven't found reliable signals for that.<br /><br />ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-60982779502853670082018-12-16T02:22:00.024-05:002018-12-16T02:22:00.024-05:00Dear Ernie,
May I ask why you don't trade dir...Dear Ernie,<br /><br />May I ask why you don't trade directionally in FX markets?<br />Thanks.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-70385951326283457402018-12-14T15:42:33.832-05:002018-12-14T15:42:33.832-05:00Trading is speculation. You have to avoid making f...Trading is speculation. You have to avoid making financial speculation.<br /><br />Rhttps://www.blogger.com/profile/02556343058535803844noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-45209487400675457722018-12-12T06:45:02.576-05:002018-12-12T06:45:02.576-05:00Hi,
An example of cointegrated currency pairs woul...Hi,<br />An example of cointegrated currency pairs would be AUD vs CAD.<br />We don't trade directionally.<br />ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-61349061766295937502018-12-11T22:23:21.498-05:002018-12-11T22:23:21.498-05:00Hi Ernie,
Thank you for quick response!
What coin...Hi Ernie,<br /><br />Thank you for quick response!<br />What cointegrated currencies do you trade? Do you trade directional strategies in FX markets too? Many thanks.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-73508154606963770322018-12-11T09:26:11.922-05:002018-12-11T09:26:11.922-05:00Hi,
It is based on the mean reversion of pairs of ...Hi,<br />It is based on the mean reversion of pairs of cointegrated currencies.<br />ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-67892795032420691992018-12-11T08:27:02.430-05:002018-12-11T08:27:02.430-05:00Hi Ernie,
May I ask what is the FX mean reverting...Hi Ernie,<br /><br />May I ask what is the FX mean reverting strategy you trade in your fund?<br /><br />Many thanks.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-37280593040818120172018-12-03T14:26:41.377-05:002018-12-03T14:26:41.377-05:00Hi Jim,
The best overall book on HFT is Algorithmi...Hi Jim,<br />The best overall book on HFT is Algorithmic and High Frequency Trading by Cartea et al. It is the last item on my Recommended Books list on the right sidebar of this blog. But of course, my own book Machine Trading also has a chapter on that, which touches on FX specifically.<br />ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-44885696247788175602018-12-02T05:16:04.706-05:002018-12-02T05:16:04.706-05:00Hi Ernie,
Would you please recommend some referen...Hi Ernie,<br /><br />Would you please recommend some references for HFT strategies, especially for FX.<br />Many Thanks.<br /><br />JimAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-9618981201398068342018-08-01T13:01:49.602-04:002018-08-01T13:01:49.602-04:00I see. Thanks!
(All that is of course provided tha...I see. Thanks!<br />(All that is of course provided that the transaction costs are low enough and the risk-free rate is at least lower than the bet's expectation..)DMnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-63577468884019809632018-08-01T12:16:59.910-04:002018-08-01T12:16:59.910-04:00Hi DM,
Yes, for every gamble with positive expecta...Hi DM,<br />Yes, for every gamble with positive expectation, there is a low enough leverage which will make it rational to take the bet.<br />ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-77924183403252863422018-08-01T11:59:46.322-04:002018-08-01T11:59:46.322-04:00Hi Ernie,
I watched Peter's presentations, and...Hi Ernie,<br />I watched Peter's presentations, and in the end it boils down to the fact that low-positive-expectation/high-risk gambles can still be attractive even in the timeseries world, just the leverage should be less than 100%.<br />So basically, if presenting the question very unmathematically, would you agree that EVERY bet with a positive expectation should be taken (i.e. it's rational to do so) provided that the leverage was choosen correctly(not just betting 100% of all the money every time) ?DMnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-84006256465358763562018-07-29T20:01:44.962-04:002018-07-29T20:01:44.962-04:00Ok, well I guess this is an example where we'r...Ok, well I guess this is an example where we're all in what they call "violent agreement".<br /><br />Just for the record, I really liked that Peters paper about ergodicity appreciate you bringing it to my attention in this blog. I also think Kahneman is correct and is not saying what you think he is (i.e., he's not saying people should consider only expected value of a bet and not consider range of possible outcomes / volatility). I also think you and Peters are correct, so it's all good :-)<br /> aagoldhttps://www.blogger.com/profile/06412033743121564751noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-25799341534258495362018-07-29T19:46:16.259-04:002018-07-29T19:46:16.259-04:00Hi aagod,
1) Actually, whether a gamble is rationa...Hi aagod,<br />1) Actually, whether a gamble is rational or not depends not only on the game itself: it depends on the relative size of one's networth to the size of the bet, as per Kelly's formula. In the example above, I showed that if the initial networth is $1,000, then it is not rational to take the gamble. However, if the initial networth were $10,000, then it would have been rational. This is because with a $10,000 networth, the probability is vanishinly small that a series of losses would have ruined the gambler. Kelly formula in fact suggests what the optimal leverage is, or conversely, what the optimal initial net worth should be if we want to maximize compound growth. In our example, it is $2,205.<br /><br />What I objected to in Kahneman's discussion is not the particular numerical values of whether that specific gamble is rational or not. I am objecting to his criterion for rationality: he based that on the expectation value of a single gamble, which is shown to be an erroneous criterion.<br /><br />2) Indeed Kelly criterion is equivalent to log utility. That is well-known. I also don't doubt that many people are irrational even according to Kelly criterion. But again, what I, and other practitioners and researchers such as Peters, objected to is the criterion the behavioral economists use for rationality. They invariably use ensemble averages, which is incorrect.<br /><br />Ernie<br />Ernie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.com