I have been experimenting with multiple methods of forecasting the daily high and low for a certain security. I have found a very basic ensemble of several common forecasting approaches is, well, highly imperfect, but better than throwing darts at a dart board. And I have a number of measures of forecast quality on historic data (but being careful to avoid look-ahead and over-fitting), such as the variance of my forecasting error and the frequency of extreme events. (The distribution definitely has tails too fat to be normal). Also, I know how often the market has historically reached various fractions and multiples of my high and low forecasts.
Here is my question: When I started playing with this, I imagined that once I had a forecast, I was done. Buy if you forecast it to go up, short if you forecast it to go down. But as I have become satisfied with my forecast, I have become more and more dissatisfied with my trading strategy. In a typical day the market reaches both above and below its opening price, and there are a large number of decisions that I do not know how to make, even though I know a lot about my forecast's quality. I need some resources, not on forecasting, but on the aspects of trading strategy besides having a forecast. Here are examples of the kind of questions I am talking about example:
- What share of my assets should I put up on a given day?
- Should I trade every day, or only when the forecast does some particular thing?
- My forecast is always of the price change relative to the opening price. Should I decide if I will go long or short when the market opens, or, e.g., if my overall forecast is for a price rise, wait until the market hits some fraction of my forecast low?
- My forecasts are unbiased. So historically I have not reached the forecast high and lows about half the time. How do I decide at what price to sell (if long) or cover (if short)? Days with a high forecast volatility are potentially the most profitable, but I don't know how much I am at risk of a margin call even though my forecast ultimately comes true. (One thing I do not have is a forecast of whether the high or the low comes first).
- How can I best insulate myself from the occasional extreme price movement against my position?
I think that should provide some idea of the kind of thing I am looking for. It seems like I should be able to answer all of these questions based on how the affect the expected value of the bottom line, but I sure don't know how. I've been looking for a literature on this, and found almost nothing, other than some interesting stuff on the Kelly criterion and a whole bunch of things I can not use, like optimal portfolio theory, or short-term market predictions based on moving averages and resistance points. Heck, weather. Traffic. Tweets.
Can anyone suggest where I should start in educating myself on these matters? Even more productive search terms for looking for these answers would be welcome.
