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Blog postThis is a post about forecasts in trading systems. A forecast is a calibrated expectation for future risk adjusted returns. In more layman like terms, it is a measure of how confident we are about a bullish (positive forecast) or bearish (negative forecast).
Perhaps it is easiest to think about forecasts if we compare them to what is not: a forecast is non binary. A binary trading system will decide whether to go long, or short, but it does not get more granular than that. It will buy, or -
Blog postI set myself last year a goal of doing one blog post a month. I have an idea for an interesting series of posts related to forecast strength, which I'd hoped to find time to research and post about. However, I've been quite busy marking exams and pushing through the production trading code for pysystemtrade (it's now at the point where I can trade manually; auto trading is next. Expect a lot of posts once it's finished explaining how to use it for live trading).
So instead here's a post ab -
Blog post"How does your risk management work?"
... is a question I'm frequently asked.
In fact this is actually a difficult question, if you were to look at my open source python backtesting project pysystemtrade, you would struggle to point at a piece of code and say "Behold! Right there, that's the risk management part alright!". The reason is that the risk management in my trading system is endogenous (from the greek, meaning 'word used to mean intern -
Blog postTime for the annual review post, as my reviews follow the UK tax year which ended on the 5th April. And what a year it has been; well 10 months or so of fairly normal stuff, followed by several weeks of stomach churning market chaos.
Previous updates can be found here, here, here, here and here.
This post will follow the format of previous posts, but there will be some extra stuff related to the more recent market action in which I'll talk in so -
Blog postThis is the final post in a series aimed at answering three fundamental questions in trading:
How should we control risk (first post)How much risk should we take? (previous post)How fast should we trade? (this post)Understanding these questions will allow you to avoid the two main mistakes made when trading: taking on too much risk and trading too frequently. Incidentally, systematic traders can add another list to that sin: overfitting. But that is a topic too large to be covered i -
Blog postThis is the second of three posts aimed at answering three fundamental questions in trading:How should we control risk (previous post)How much risk should we take? (this post)How fast should we trade? (next post)These questions are extremely important, IMHO much more important than the question of which funky indicator to use.
I won't be able to discuss all the finer details of position scaling here, as the post would be extremely long. If you find my approach interesting, you may w -
Blog postStop losses are the most common method used by traders to control risk. However, they're often used inappropriately. In this post I'll quickly bust some of the myths around them, and explain how to use them properly.
This is the first of three posts aimed at answering three fundamental questions in trading:How should we control risk (this post)How much risk should we take? (next post)How fast should we trade? (final post)If you find my approach interesting, you may want to read some -
Blog postThis is part X of my series of blog posts on skew and kurtosis, where 2<X<5. Part X, because it depends on how you number them! If you were to read them in a logical order then the series looks something like this:A post on skew: measuring, and it's impact on future returnsA post on kurtosis: measuring, it's impact on future returns, and it's interaction with skew.A post on trend following and skew (which I actually wrote first, hence the confusion!)This post: on using skew and k
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Blog postIn my recent posts on skew and kurtosis I've put together a large number of ideas for possible trading strategies. The next step will be to create and test these ideas out. However I already know from my initial analysis that many of these ideas will probably have poor performance. This leaves me in something of a conundrum. In fact this is just one example of the conundrum that strategy developers face all the time.
Do I ignore these strategies completely, which will result in my h -
Blog postIn my last post, I stated my intention to write a series of posts about skew.
Slight change of plan, since one loyal reader suggested that I write about kurtosis. I thought that might be fun, since I haven't thought about kurtosis much, and the literature on kurtosis isn't as well developed. It turns out that considering both together leads to some very interesting results.
The plan is to basically repeat my previous analysis of skew for kurtosis. Then my subsequen -
Blog postSome bloke* once said "The most overlooked characteristic of a strategy is the expected skew of it's returns, i.e. how symmetrical they are"
* It was me. "Systematic Trading" page 40
Skew then is an important concept, and one which I find myself thinking about a lot. So I've decided to write a series of posts about skew, of which is the first.
In fact I've already written a substantive post on trend following and skew, so this post is so -
Blog postThis month* marks the release of my third book, with the snappy title "Leveraged Trading", and the slightly less snappy subtitle "A professional approach to trading FX, stocks on margin, CFDs, spread bets and futures for all traders".
Photo courtesy of Harriman House. As you can see, the book makes an excellent books-stand for itself
* Official publication date is 29th October. Actually I finished the book in late August, and I've had print copies in -
Blog post(Both) regular followers of this blog will have been on tenterhooks for many months now, waiting for my next post. I have been busy! First of all, I've been finishing my third book. More detail on that later, in the next post. I've also had a fair bit of holiday time. But mainly over the summer I've been building my own garden office.
Now a post about constructing a garden office might seem rather off topic in a quant trading/investing blog. But, (i) there has been a fair bit of interest i -
Blog postHard to believe, but it has been five and a half years since I had to go to an office to manage other peoples money, and exactly five years since I began systematically trading my own. Time then for another annual review. Perhaps it is confusing for overseas readers, but these reviews follow the UK tax year which runs from 6th April to 5th April, rather than any logical period like a calendar year (or even 1st to April to 31st March would make more sense, frankly).
Previous updates -
Blog postQuite a few of my recent blog pieces have been picked up by the lovely folk at allocate smartly. So I thought I'd write an asset allocation piece, as the readers of my second book "Smart Portfolios" probably feel neglected with the lack of articles on investment rather than trading.
Absolute or relative momentum?
The motivation for this comes from a table in my second book, which exposes an interesting problem. Here is the table (actually a slightly modifie -
Blog postIn this post I discuss a well known stylised fact of the investment industry: "Trend following is a positively skewed strategy".
Spoiler alert: yes it is (sort of), but it's much more complicated (and interesting!) than you might think.
A quick primer on positive skew
So what actually is positive skew? Essentially it's an asset, or trading strategy, whose returns have the following profile:A high proportion of relatively poor returnsThe losing returns ar -
Blog postThis post is all about handcrafting; a method for doing portfolio construction which human beings can do without computing power, or at least with a spreadsheet. The method aims to achieve the following goals:Humans can trust it: intuitive and transparent method which produces robust weightsCan be easily implemented by a human in a spreadsheetCan be back testedGrounded in solid theoretical foundationsTakes account of uncertainty in data estimatesDecent out of sample performanceAddresses the
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Blog postThis post is all about handcrafting; a method for doing portfolio construction which human beings can do without computing power, or at least with a spreadsheet. The method aims to achieve the following goals:Humans can trust it: intuitive and transparent method which produces robust weightsCan be easily implemented by a human in a spreadsheetCan be back testedGrounded in solid theoretical foundationsTakes account of uncertainty in data estimatesDecent out of sample performanceAddresses the
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Blog postThis post is all about handcrafting; a method for doing portfolio construction which human beings can do without computing power (although realistically you'd probably need a spreadsheet unless you're some kind of weird masochist). The method aims to achieve the following goals:Humans can trust it: intuitive and transparent method which produces robust weightsCan be easily implemented by a human in a spreadsheetCan be back testedGrounded in solid theoretical foundationsTakes account of uncertai
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Blog postI've talked around a type of portfolio construction called "Handcrafting" for some time now, in both of my first two books, and in the odd blog post. I thought it would be useful to explain how the technique works in a more thorough and complete series of blog posts, and also share some code that implements the method.
This is the first of four posts on the handcrafting method.The first post motivates the need for a method like this.In the second post I build up -
Blog postLet's begin this post with a gross generalisation:
Professional traders tend to measure risk and target risk using standard deviation. Amateur traders tend to use a funky little number called the ATR: 'Average True Range'.
Both try and achieve the same aim: summarise the typical movement in the price of something using a single number. However they are calculated differently. Can we reconcile the two measures? This is an important thing to do - it will help us understan -
Blog postI get asked this question at least once a week. As those of you that have met me IRL ('in real life') will know I have limited patience and I'm easily bored. I'm definitely bored of answering this question. This post is the last time I'll answer it.
There are broadly two ways to answer this question:Looking at fundamental reasons why trend following is less likely to workSome kind of statistical analysisAre there fundamental reasons why trend following won't work any more?
Som -
Blog postFirst an apology. It's been quite a few months since my last blog post. I've been in book writing mode and trying to minimise outside distractions. Though looking at my media page since my last blog post I've done two conferences, a webinar, a book review, a guest lecture, a TV panel discussion and written six articles for efinancialcareers.com. So maybe I haven't done a great job as far as filtering out the noise goes.
Anyway the first draft of the book is now complete, and I -
Blog postWe are long.The price jumps up. Good.But this means the risk goes upSo cut our position, just as we're finally making serious money. How can this make sense?
This is a post about volatility targeting - dynamically adjusting your positions according to your estimate of market volatility - in the context of trend following systems. I blindly do this when building all my trading strategies without thinking about it - but is this a good thing to do?
It's also a po -
Blog postSince I was a young lad there has been an ongoing fight in Financial Academia 'n' Industry between two opposing camps:In the red corner are the Utilitarians. The people of classical finance, of efficient frontiers, of optimising for maximum return at some level of maximum risk.In the blue corner are the Kellyites. Worshipping at the feet of John Kelly and Ed Thorpe they have only one commandment in their holy book: Thou shalt maximise the expectation of log utility of wealth.This post is sort of
Books By Robert Carver
Smart Portfolios: A practical guide to building and maintaining intelligent investment portfolios
Sep 18, 2017
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