AI
Thursday, November 25, 2010 4:45:12 AM
Re: Ladder
The ideal case would be for an asset that you knew its price was going to remain within a tight range, never broke out above or below that range, and that zig and zag'd a lot.
If you identify such a tight but volatile range then you can trade larger amounts frequently and knock out some large trading gains.
The VIX is a maybe one example of such a potential case i.e. it can't rise above 100 nor fall below 0
I might set up a Ladder to trade all IN/OUT between 10 and 100 values
In this example I've used 5% moves between steps, historically since 1990 I believe the VIX has cycled through 5% moves around 64 times each year on average (full up/down or down/up 5% type rotations).
In this example I've allocated $100K of funds and each 5% cycle generates a gross D'Alembert gain of $106, so after costs of perhaps $12.50 per trade x 2 trades per cycle = -$25 for around a $80 net gain per cycle.
$80 net gain per cycle x 64 cycles traded on average each year = $5120 net profit per year (5.12% of total funds allocated).
If on average half of funds are IN and half OUT and that cash makes perhaps 4% in interest, then that adds perhaps 2% to those rewards for a 7% type reward. Or if we only consider the actual funds at risk then the ladder might be considered as having produced around a 10.24% gain on average at risk amount assuming 50% average exposure amounts.
If I narrow the range further and set ladder to top at 80 and bottom at 10, then that uplifts gains to around 5.9%
Another aspect that can improve rewards is not to trade each and every step. If a current trend continues and I miss trading one step amount and instead trade two amounts at the next step price level, and then do the same in the other direction, the single trade size amounts are larger and across a wider price move range such that the gains are a square function. A benefit with Ladder, as with AIM is that gapping (large rapid moves in a particular direction) work in your favour as they allow you to buy more cheaper, or sell more higher.
I would suggest therefore that ladder is better suited to trading fixed range investments rather than being used as a sub-level method to trade within AIM buy/sell hold zone bands.
I should also mention that trading the VIX isn't (or rather wasn't when I last checked, which reminds me to have another look) viable in practice due to the high costs of trading that Index. It costs a lot to maintain such an index, so those costs get passed on.
The ideal case would be for an asset that you knew its price was going to remain within a tight range, never broke out above or below that range, and that zig and zag'd a lot.
If you identify such a tight but volatile range then you can trade larger amounts frequently and knock out some large trading gains.
The VIX is a maybe one example of such a potential case i.e. it can't rise above 100 nor fall below 0
I might set up a Ladder to trade all IN/OUT between 10 and 100 values
In this example I've used 5% moves between steps, historically since 1990 I believe the VIX has cycled through 5% moves around 64 times each year on average (full up/down or down/up 5% type rotations).
In this example I've allocated $100K of funds and each 5% cycle generates a gross D'Alembert gain of $106, so after costs of perhaps $12.50 per trade x 2 trades per cycle = -$25 for around a $80 net gain per cycle.
$80 net gain per cycle x 64 cycles traded on average each year = $5120 net profit per year (5.12% of total funds allocated).
If on average half of funds are IN and half OUT and that cash makes perhaps 4% in interest, then that adds perhaps 2% to those rewards for a 7% type reward. Or if we only consider the actual funds at risk then the ladder might be considered as having produced around a 10.24% gain on average at risk amount assuming 50% average exposure amounts.
If I narrow the range further and set ladder to top at 80 and bottom at 10, then that uplifts gains to around 5.9%
Another aspect that can improve rewards is not to trade each and every step. If a current trend continues and I miss trading one step amount and instead trade two amounts at the next step price level, and then do the same in the other direction, the single trade size amounts are larger and across a wider price move range such that the gains are a square function. A benefit with Ladder, as with AIM is that gapping (large rapid moves in a particular direction) work in your favour as they allow you to buy more cheaper, or sell more higher.
I would suggest therefore that ladder is better suited to trading fixed range investments rather than being used as a sub-level method to trade within AIM buy/sell hold zone bands.
I should also mention that trading the VIX isn't (or rather wasn't when I last checked, which reminds me to have another look) viable in practice due to the high costs of trading that Index. It costs a lot to maintain such an index, so those costs get passed on.
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