How to balance the portfolio for research purposes?

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How to balance the portfolio for research purposes?

posted Apr 18, 2015

Hi,

I have a system for determining when I want to buy / sell an asset, and I have written the code for it. The problem is that the returns and so on are highly dependant on the initial settings - how much cash to start with, how large positions to take and so on.

At the moment I buy or sell the stocks for $500 each time, and have $10k initially.

Important properties for me is that the approach is simple and easy to recreate, as I'm doing it as part of my studies. It should also be realistic, i.e. it should reflect what the strategy would produce if used in reality. Anyone knows what this is called (the determination of the size of positions, initial cash balance and so on), and how it's usually done?

I have 0-20 events per day, but I don't have to trade on all of them (it's not necessary to limit the position to 1/20 of the value.)

(I'm obviously not a student of economics or finance. I welcome any help from example strategies to keywords that I can google.)

2 responses

@Epic T., A common position sizing technique is the Kelly Criterion. Given a probability (edge) and an account size, it can help you determine the size of each trade (bet).

I created a simple KellyFormula test page in JavaScript that I've previously posted here: Kelly position sizing test page

And there have been other posts here about other treatments of using Kelly Criterion.

Thank you Market Tech. An interesting read.

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.