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Good morning, I have a question, regarding position size in algorithmic trading.

I have a strategy that every day generates signals for buying or selling positions on different stocks. I'm looking for the hints and advices in order to manage and optimize position sizing of my strategy, where can I start my research from?


I tried with portfolio management and risk management but they usually refer to a different scenario.

Note that I hold these position for about 20 days and that signals are not evenly distributed in time. For example, you can have 20 signals in a day and zero signals for a week.

Thanks

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    $\begingroup$ Kelly Criterion? $\endgroup$
    – nimbus3000
    Jul 31, 2019 at 9:05
  • $\begingroup$ Hi: I couldn't find much either (besides kelly which doesn't always apply) so I just end up scaling the position so that it's proportional to the signal strength. But everyone's signal strength is different. In my case, it's the probability of obtaining the target return given the horizon. $\endgroup$
    – mark leeds
    Jul 31, 2019 at 17:04
  • $\begingroup$ If you don’t mind, what is the way you generate signals? $\endgroup$
    – John
    Jan 24, 2020 at 22:22

3 Answers 3

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If you already have a strategy generating potential long and short positions, you may want to check Chapter 10 of Marcos López de Prado's book Advances in Financial Machine Learning. It describes a number of strategies that include a budgeting approach where you only rely on the number of concurrent long and short positions to optimize position sizing. If you have the probability or confidence in a particular position you can use that to derive a position size as well (he calls this the meta-labeling approach).

I've created a Jupyter Notebook that implements his sizing strategies and examples here. It is part of a larger project by a number of people to implement and continue de Prado's work, and bet sizing will be released as part of an update to the mlfinlab Python package

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You have to consider seriously to use portfolio construction, at least for risk management purposes. To start with, you should "backtest" the risk you are taking with your current "proportional strategy". What would have been:

  • the volatility of your portfolio (ie your aggregated positions) in the past?
  • your maximum loss (max draw down) in the past with this strategy?
  • etc.

you will see that it is a function of:

  • the proportionality coefficient you have chosen
  • the volatility of the stocks your are taking positions on
  • the correlations between your positions

Portfolio construction is simply about adjusting the coefficient to the two other quantities, based on reliable estimated of the volatilities and the covariance. You should really do it.

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where can I start my research from?

Searching for asset allocation papers and portfolio construction papers will yield far better results. Here are a few papers you may find interesting to get you started:

Optimal Trade Sizing in a Game with Favourable Odds: The Stock Market

A Quantitative Approach to Tactical Asset Allocation

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