Alexandre,
Very interesting stuff. Thanks for sharing.
What if, instead of starting with a fixed list of instruments, you use a similar approach to select the instruments for your algorithm from a larger universe of instruments?
I've been thinking a lot about the different ways to implement a similar approach, but one that uses dynamic filtering to select and modify the current portfolio based on strength, correlation of instruments and volatility of instruments and portfolio. In effect you would have a fixed 'parking lot' of X instruments from a possible universe of Y instruments.
In theory this type of approach sounds appealing to me, but there are a lot of moving parts. Here's a brief summary of my thinking on some different ways to approach to this. I would be curious to hear your and the community's thoughts on implementing similar approaches.
Risk Management
- Total Risk Budget: X%
- Maximum Initial Risk Per Trade: X%
- Maximum Open risk Per Trade: X%
Correlation
- If X% of positions have correlation coefficient > Y to each other, close position and take next new signal OR
Volatility
- If X day ATR increases by X% over last Y days, reduce/liquidate position
- If X day ATR for increases by X% over last Y days, reduce positions
Dynamic Portfolio Selection
Ranking
- Add/Remove/Reduce/Replace positions if
- Oldest position has been open for X periods or
- Ranking falls below some threshold
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