AIM UK

[ls7550]

D'Alemberts.

AIM has many common features to D'Alemberts betting sequence, but played on both sides at the same time, as though a two party partnership had split their combined funds and one was playing a roulette tables reds using D'Alemberts whilst their partner played blacks.

Reflected into stocks this means one side starting 100% loaded in stocks and playing the short side whilst the other starts 100% in cash and plays the long side. Or simply, as per AIM, collectively starting with 50% stock and 50% cash.

However playing just one side, the long side volatility capture (which entails starting with 100% cash and 0% stock exposure) with twice the sized bankroll will generally perform equally to that of playing both sides (separately playing both the long and short side volatility capture).

I've updated the iBox to reflect greater detail as to such a single sided (long) view.

Being 100% in cash however loses out if/when stock prices rise, so to accommodate price appreciation capture we have to do something else with those cash reserves. A stop-loss based style is ideal for this purpose as that will typically get us back into cash relatively quickly as stock prices start to decline, freeing up the cash for the volatility and downside cost averaging components to do their work. Yet provide us with acceptable gains when prices generally rise.

The tighter level of downside indicated by cWave means that we trade larger amounts than might be indicated by more conservative (lower) bottom price level indicators, which in turn can significantly magnify the volatility capture gains.

Unlike in the casino where if you encounter a sequence of losers you can lose your entire bankroll, when applied to stocks the worse case scenario is that you end up 100% in stock bought at a cost averaged discount level relative to the initial start dates price level. The price may remain below that bottom level for a period of time - so you become a buy-and-holder who bought in at an average price level somewhat close to that 'bottom' price level. Ultimately however the price will again rise back up and through the bottom price level at which time you recommence volatility capture trades.

Clive.