Inverse Volatility Position Sizing

Recently I’ve had several of my consulting clients come with a strategy that uses Inverse Volatility Position Sizing. The basic idea is that the more volatile positions have smaller size while the less volatile ones get a larger size. I have always been a fan of equal position sizing for several reasons. One, it is simple to do. Two, it is one less variable to optimize on and thus overfit on. Three, I rarely see much change in the metrics I care about when using more sophisticated algorithms.

Inverse Volatility Position Sizing is said to slightly reduce returns but has a big decrease in drawdowns and an increase in Sharpe Ratio. Time to test and see if that is true.

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Trend-Following Plus Momentum in ETFs

In a previous post, Trend-following vs. Momentum in ETFs, I compared trend-following and momentum to see which produced better results on a basket of ETFs. In the post, I mentioned combining trend-following and momentum into one strategy to see if combined they can beat buy and hold more often.

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Trend-following vs. Momentum in ETFs

In Tactical Asset Allocation (TAA) or Dual Momentum (DM) strategies, they often will use trend-following or momentum to decide whether to invest in asset or not. I have two questions. One, how often does either trend-following or momentum out-perform buy and hold? Two, of the two which one out-performs the other more often?

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Exiting using limit orders

Most of us focus our research time looking to find better entries. We don’t spend enough time thinking about our exits. I am definitely guilty of this. A popular way to enter a mean reversion trade is by using a limit order. I use that on the strategy on RSI2 Strategy: Double returns with a simple rule change post.

The exit on that strategy is on the open. Many people don’t like exiting on the open because of the volatility and the belief that you will get a bad fill. What if we exit instead using limit orders? I tested this idea years ago. Time to revisit an old idea.

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The Simplest Momentum Indicator

We all have our favorite momentum indicators. One of mine is percent off 1 year high. This requires 252 data points and comparisons, plus a division. Another one is the 200-day moving average. This requires 200 closing prices, 199 additions and a division. A simple momentum indicator is Rate of Change which is the return of the asset of the last N days. This requires two prices and a division to calculate. That is simple. In this post I will show one that requires just one price and no math.

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Monthly Rotation – Closeness to $10

It is funny that my last post, Brazilian Jiu-Jitsu & Trading – Shiny New Toy, because this post is definitely chasing a shiny toy. I was reading the August 2019 Technical Analysis of Stocks & Commodities issue and came across the article “Swing Trading 10-Point Breakouts.” The basic concept was looking for stocks basing under a multiple of $10, then buy when it closes about that multiple. For example, the stock is trading at $29.50. Then closes at $30.25, buy it. I am thinking there is no way this can work. My curiosity got the better of me and I was off chasing the Shiny New Toy.

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Brazilian Jiu-Jitsu & Trading – Shiny New Toy

A very strong parallel between Brazilian Jiu-Jitsu (BJJ) and trading is the chasing of the shiny new toy. In BJJ, we often want to learn the new submission (Peruvian Necktie or Snake in the Grass Choke) we saw on YouTube. Or the new type of guard (Lapel Guard or 50/50 Guard). In trading, this is chasing the new technical indicator or new position sizing method or new strategy we read on some blog.

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Market Timing and Bond ETFs

In my last two posts, Market Timing with a Canary, Gold, Copper, LQD, IEF and much more and Day of Month and Market Timing, I assumed that we earned no interest in cash. Most methods did a good job of telling us when to be in the SPY and when to be in cash. How much could we boost returns by investing the cash in a bond fund?

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Brazilian Jiu-Jitsu and Trading – Focus

I have been practicing martial arts for the last 21 years and Brazilian Jiu-Jitsu (BJJ) for the last 9 years. Over the years I have come to appreciate how BJJ helps my trading. And also, how my trading helps my BJJ. The lessons and similarities go both ways.

Due to a recent injury, more details at the end, I am out of BJJ for the next 6 weeks. I plan to write several posts about how BJJ influences my research and trading to keep thinking about BJJ. These posts will be short and interspersed between my regular posts.

Icons made by Freepik from www.flaticon.com is licensed by CC 3.0 BY

One of my favorite parts about BJJ is that it forces you to focus. At the start of class, I am often still thinking about the research and trading day. I may be happy with my trading results for the day. Or thinking about a solution to research project or how to improve a client’s strategy.

But I must quickly focus on the class and my training partner. He will soon be actively be trying to break my arm or shoulder or leg or choke me. There is nothing like being “attacked” to force you to focus.

Being a smaller, older & lighter guy with most of the other students being 50% or more heavier than I, means I have little room for error. The focus comes quick and I forget about the day I had.

The benefit to this focus usually comes after class in the shower. That is when I will frequently come up with new trading ideas or solutions. The time of not thinking about the day lets ideas ruminate in the back of my brain.

As much as I love researching and trading the stock market, this time to not think about it is critical. Find your activity that forces you to stop thinking about the market. Even going for walks in nature, my best method for finding solutions, works surprisingly well.

solvitur ambulando

Injury report. I tore my left medial meniscus. To be more specific, I had a bucket-handle tear. As to how it happened. Well it was wear and tear of 21 years of martial arts, plus a previous ACL surgery plus getting old. The straw that tore the meniscus, was a 6 inch jump in the air.

I just got surgery last week to fix it. All is going well and pain free. Now comes the hard part. Taking it easy to allow it to heal.

Good quant trading,

Market Sell-off Analysis How often does a 5% market sell-off become a 10% sell-off?

We often hear that the market is 5% off its highs or that it is down 5% from the high of the year. This alone does not tell us much. The question I want answered is how often does that 5% loss become a 10% loss? Or worse yet a 20% loss?

Read the rest of my guest post, Market Sell-off Analysis: Baseline Historical Facts,  over at Alpha Architect.

Good quant trading,