Sunday, August 24, 2014 4:27:59 PM
Hi Steveg_123
Ladder is based on a log stochastic scaling. The predictive part is deciding on the limits (top and bottom). Thereafter its just a case of applying the calculation using those levels and the current price.
cash % = (log(current) - log(bottom)) / (log(top) - log(bottom))
For example if you suspect the top will be 100, the bottom 50 and the current is 75 then
( log(75) - log(50) ) / (log(100) - log(50)) = 0.585 (58.5%) cash (inverse correlated fund) indicated.
The next requirement is deciding when to trade. The larger the moves before trading the lower the costs (fewer trades) and the larger the reward upon sizeable reversals. The optimum would obviously be to hit the exact peaks and troughs for zigzags within the top and bottom price range - but that's a impossibility. Fundamentals/PnF/ZigZag/news/W%R etc type methods might be employed when making such 'when to trade' decisions. There's no magic single method that consistently works well - if when you do sell some stock and the price continues on up, you relatively lost out by selling early. Similarly if you buy more stock and the prices continues down you relatively lost out by buying too early.
Whilst you could use linear stochastic i.e. ((75-50)/(100-50)) =0.5 (50%) for wider ranges using log scaling helps to keep things more proportional across the entire range.
Standard AIM can't run out of stock to sell, but it can exhaust cash (has a bottom). LD-AIM can run out of stock or cash (has both a top and bottom). AIM adds when prices decline, reduces when prices rise. So ladder and LD-AIM are somewhat the same sort of thing. With ladder the top and bottom are more transparent and can be fine tuned/dynamically adjusted more easily. For instance you might opt to revise the top and bottom over time to coincide with Bollinger Bands. Note that for Bollinger bands often during a sustained up-trend the price will tend to rattle along quite close to the upper Bollinger Band - where you'd be near all-out. Similarly during sustained down trends then the price tends to rattle along the bottom Bollinger Band - where you'd be near all-in. Which is a bad stance (miss a sizeable amount of up-run, near all-in/heaving exposed to down-runs).
Ladder as cash% is better suited to zigzag ranging between where volatility capture gains become apparent. In some cases you might want to totally flip the ladder - if you think that the stock/fund is trending higher or lower then log stochastic cash% might be flipped to being considered a stock% value. A relatively long moving average can provide a indicator of the broader trend
With a fund and its inverse (short) fund, at 50% 'cash' you're neutral (long 50, short 50), as the price rises so you reduce the long, increase the short (becomes more short), as the prices declines so you reduce short, increase long. i.e. anticipates mean reversion. In some cases however holdings might go straight up and out of the top (all in cash/short). In other cases it might drop down and out of the bottom (all in stock/long). Outside of the top and bottom levels and your ladder becomes static/fixed (all in or all out). Being all out isn't a problem as you can start a new investment. Being all in and seeing the price below your bottom price level involves either sitting and waiting for a upward recovery, or opting to take a loss and close the position and move on to something else. Or you can revise the top and bottom values to account for perceived likely tops and bottoms.
Generally its all just a guess (luck). Guess more right than wrong and you'll likely churn a profit. Guess wrong and you lose out. Ladder is just a mathematical means that can help with deciding how much stock/cash to have at risk at any one time for each such guess. For instance with the S&P currently above its 200 day moving average it looks like a up-trend, so ladder (log stochastic) might be considered as being a stock% value. Within that the price is near its upper Bollinger band, so ladder with top/bottom set at those bollinger bands would be relatively heavily in stock more recently. As the price declines towards the lower Bollinger so lighten up on stock, increase cash. If the 200 day moving average is breached then consider switching from ladder using a long stock holding to using a short stock holding and flip to using ladder = cash%. If the trend starts to zigzag around a flat trend (sideways volatility), then ladder using cash% to potentially capture some of the zigzag moves.
Ladder is based on a log stochastic scaling. The predictive part is deciding on the limits (top and bottom). Thereafter its just a case of applying the calculation using those levels and the current price.
cash % = (log(current) - log(bottom)) / (log(top) - log(bottom))
For example if you suspect the top will be 100, the bottom 50 and the current is 75 then
( log(75) - log(50) ) / (log(100) - log(50)) = 0.585 (58.5%) cash (inverse correlated fund) indicated.
The next requirement is deciding when to trade. The larger the moves before trading the lower the costs (fewer trades) and the larger the reward upon sizeable reversals. The optimum would obviously be to hit the exact peaks and troughs for zigzags within the top and bottom price range - but that's a impossibility. Fundamentals/PnF/ZigZag/news/W%R etc type methods might be employed when making such 'when to trade' decisions. There's no magic single method that consistently works well - if when you do sell some stock and the price continues on up, you relatively lost out by selling early. Similarly if you buy more stock and the prices continues down you relatively lost out by buying too early.
Whilst you could use linear stochastic i.e. ((75-50)/(100-50)) =0.5 (50%) for wider ranges using log scaling helps to keep things more proportional across the entire range.
Standard AIM can't run out of stock to sell, but it can exhaust cash (has a bottom). LD-AIM can run out of stock or cash (has both a top and bottom). AIM adds when prices decline, reduces when prices rise. So ladder and LD-AIM are somewhat the same sort of thing. With ladder the top and bottom are more transparent and can be fine tuned/dynamically adjusted more easily. For instance you might opt to revise the top and bottom over time to coincide with Bollinger Bands. Note that for Bollinger bands often during a sustained up-trend the price will tend to rattle along quite close to the upper Bollinger Band - where you'd be near all-out. Similarly during sustained down trends then the price tends to rattle along the bottom Bollinger Band - where you'd be near all-in. Which is a bad stance (miss a sizeable amount of up-run, near all-in/heaving exposed to down-runs).
Ladder as cash% is better suited to zigzag ranging between where volatility capture gains become apparent. In some cases you might want to totally flip the ladder - if you think that the stock/fund is trending higher or lower then log stochastic cash% might be flipped to being considered a stock% value. A relatively long moving average can provide a indicator of the broader trend
With a fund and its inverse (short) fund, at 50% 'cash' you're neutral (long 50, short 50), as the price rises so you reduce the long, increase the short (becomes more short), as the prices declines so you reduce short, increase long. i.e. anticipates mean reversion. In some cases however holdings might go straight up and out of the top (all in cash/short). In other cases it might drop down and out of the bottom (all in stock/long). Outside of the top and bottom levels and your ladder becomes static/fixed (all in or all out). Being all out isn't a problem as you can start a new investment. Being all in and seeing the price below your bottom price level involves either sitting and waiting for a upward recovery, or opting to take a loss and close the position and move on to something else. Or you can revise the top and bottom values to account for perceived likely tops and bottoms.
Generally its all just a guess (luck). Guess more right than wrong and you'll likely churn a profit. Guess wrong and you lose out. Ladder is just a mathematical means that can help with deciding how much stock/cash to have at risk at any one time for each such guess. For instance with the S&P currently above its 200 day moving average it looks like a up-trend, so ladder (log stochastic) might be considered as being a stock% value. Within that the price is near its upper Bollinger band, so ladder with top/bottom set at those bollinger bands would be relatively heavily in stock more recently. As the price declines towards the lower Bollinger so lighten up on stock, increase cash. If the 200 day moving average is breached then consider switching from ladder using a long stock holding to using a short stock holding and flip to using ladder = cash%. If the trend starts to zigzag around a flat trend (sideways volatility), then ladder using cash% to potentially capture some of the zigzag moves.
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