Re: [batsig] holding-period exit strategy

From: Ben G.
Sent on: Wednesday, December 2, 2009 2:44 PM
Hi Dan,

Your holding period strategy is indeed one approach to systematic trade risk management, and therefore "disconnects terror and greed" from getting out of a trade. I agree that rules for getting out of a trade are the most important aspect of trade risk management. (At the meetup we also talked briefly about higher-level portfolio risk management, which is about choosing optimal trade size according to expected gain / loss and the Kelly criterion. In this thread I believe we are talking about 'just' managing the risk of a single trade once it is active.) And yes, I agree that holding period is trivial to backtest.

That said, I would be concerned that holding period exit exposes the trader to hidden volatility risk. Assume we are long. What happens if the bid touches the trader's ideal P&L gain level before the end of the holding period, but then drops again? The holding period approach loses out on this potential upside and gains little in return, except the easy backtesting.

On the other hand, if the market plunges before the end of the holding period but then rebounds -- the trader is better off because the position is still active without the P&L loss. However in this case, there is a real likelihood of a margin violation before the rebound. Personally I would not be willing to risk a margin call which gets me forcibly knocked out of my trades because I did not put on a stop loss order.

We could think of the holding period strategy as one that performs best when the trade will have low volatility, a trade that will not swing wildly toward potential stop loss / take profit levels. This is what I mean by "volatility risk." If you are using a holding period exit approach, you are effectively "short volatility" in your view of the market. As long as this is intentional, then by all means go for it. But I think stop loss / take profit orders are still the more robust trade risk management approach.

Cheers,
Ben


On Wed, Nov 18, 2009 at 12:04 PM, DAN BIKLE <[address removed]> wrote:
People,

In the presentation last night, Ben presented the idea that you should
follow a systematic process when you acquire a position in a
tradable-thing.

And, he advocated that you be systematic about how you exit that position.

His example exit was stop-loss and take-profit which he diagrammed on
the white-board.

I like another exit strategy which I call "holding-period".

It is not any better or worse than Ben's strategy, it's just different.

It is similar to Ben's example strategy in the respect that it is not
tied to your sentiments or fears.

An example of the holding-period exit strategy is:

"After I acquire 100 shares of IBM, I will hold it for 20 trading
days. ?Then, 1 minute before market close on the 20th day, I will sell
those shares for the currently bid price."

Why do I like holding-period-exit-strategy?

Because:
?- It disconnects my terror and greed from the exit decision
?- It is easy to model and backtest

Remember what Ben said about backtesting?

I do.

Here is my opinion which is similar to Ben's.

Any trading you do should be backed by the confidence of testing
(using historical or suitably simulated price actions).

If you want to see some examples of backtests using the
holding-period-exit-strategy,
I offer these URLs below:

?- http://bikle.com/protected/mix_oracle_ruby_etf
?- http://bikle.com/protected/sim
?- http://bikle.com/protected/vlm
?- http://bikle.com/protected/vlp

--Dan


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