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Market Analysis & Position Sizing (Both Equally Necessary) = We have a plethora of market analysis, selection and timing techniques…..but We have no method,

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Presentation on theme: "Market Analysis & Position Sizing (Both Equally Necessary) = We have a plethora of market analysis, selection and timing techniques…..but We have no method,"— Presentation transcript:

1 Market Analysis & Position Sizing (Both Equally Necessary) = We have a plethora of market analysis, selection and timing techniques…..but We have no method, no framework, no paradigm, for the equally important, dark nether-world of position sizing.

2 Part 1 Optimal f

3 f = | Biggest Losing Outcome for 1 Unit | / f$ f$ = Account Equity / Units Example: -$10,000 Biggest Losing Outcome, $50,000 Account, and I have on 200 shares, (2 units ): f$ = 50,000 / 2 = 25,000 f = | -10,000 | / 25,000 =.4 Where: Everyone, on Every Trade, on Every “Opportunity” Involving Risk, has an f value (whether they acknowledge it or not): (also f$ = | Biggest Losing Outcome for 1 Unit | / f

4 f$ and GHPR Invariant to Biggest Loss BiggestLossf f$GHPR – – – – –

5 Trajectory Cone (Bell-Shaped on all 3 Axes)

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7 The distribution can be made into bins. A scenario is a bin. It has a probability and An outcome (P/L)

8 2:1 Coin Toss

9 Mathematical Expectation 2:1 coin toss: ME =.5 * * 2 = =.5

10 f value example – 2:1 Coin Toss $10 stake Worst Case Outcome -1 I’m wagering $5 (5 units) f$ = 10 / 5 = 2 (one bet for every $2 in my stake) f =|-1| / 2 =.5 When biggest loss is manifest, we lose f% of our stake – 50% in this case

11 The Mistaken Impression Multiple made on stake = 1 + ME/|BL| * f (a.k.a Holding Period Return, “HPR”)

12 Optimal f is an Asymptote

13 The Real Line ( f )

14 f after 40 plays

15 40 Plays 1 Play

16 f after 40 plays At.15 and.40, makes the same, but drawdown changes At f=.1 and.4, makes the same, But drawdown changes!

17 f after 40 plays Beyond.5, even in this very favorable game, TWR (multiple) < 1, meaning you are losing money and will eventually go broke if you continue

18 f after 40 plays Points of Inflection: Concave up to concave down. Up has gain growing faster than drawdown.(but these too migrate to the optimal point as the number of holding periods grows!)

19 f after 40 plays

20 Most Favorable Blackjack Condition Optimal f =.06 or risk $1 for every $16.67 in stake

21 Part 2 The Leverage Space Portfolio Model

22 Modern Portfolio Theory

23 Why The Leverage Space Model is Superior to Traditional (Modern Portfolio Theory) Models: 1.Risk is defined as drawdown, not variance in returns. 2.The fallacy and danger of correlation is eliminated. 3.Valid for any distributional form – fat tails are addressed. 4.The Leverage Space model is about leverage, which is not addressed in the traditional models.

24 Leverage has 2 Axes – 2 Facets The instant case of how much I am levered up How I progress my quantity with respect to time / equity changes f

25 The fallacy and danger of correlation Fails when you are counting on it the most – at the (fat) tails of the distribution. Traditional models depend on correlation – Leverage Space model does not. -cl/gc (all days) r=.18 (cl>3sd) r=.61 (cl<1sd) r=.09 -f/pfe (all days) r=.15 (sp>3sd) r=.75 (sp<1sd) r=.025 -c/msft (all days)r=.02 (gc>3sd) r=.24 (gc<1sd) r=.01

26 f after 40 plays

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37 Why The Leverage Space Model is Superior to Traditional (Modern Portfolio Theory) Models: 1.Risk is defined as drawdown, not variance in returns. 2.The fallacy and danger of correlation is eliminated. 3.Valid for any distributional form – fat tails are addressed. 4.The Leverage Space model is about leverage, which is not addressed in the traditional models. (on both axes of “Leverage”)

38 Part 3 The Leverage Space Model Software Implementation

39 Link for how to gather your data and create scenarios & probabilities:

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41 Here is the data I am using (this is from the link example from the previous slide) :

42 Date,Equity Jan-07, Feb-07, Mar-07, Apr-07, May-07, Jun-07, Jul-07, Aug-07, Sep-07, Oct-07, Nov-07, Dec-07, Jan-08, Feb-08,813.00

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65 Part 4 The Leverage Space Model Using The Paradigm

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68 We have seen how position sizing is equally as important as market analysis, selection and timing. The Leverage Space Model is both a (Superior) Portfolio Model, but also a Paradigm for examining “Position Sizing.” With this paradigm, we need no longer operate in this dark nether-world, riddled with heuristics, misinformation, and essentially mere alchemy (e.g. 1% rules, “Half Kelly,” “Fixed Ratio,” “Modern Portfolio Theory”).

69 Market Analysis & Position Sizing (Both Equally Necessary) = We have a plethora of market analysis, selection and timing techniques…..but We have no method, no framework, no paradigm, for the equally important, dark nether-world of position sizing.

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