Hi Grabber, let's chew some fat:
Very interesting that something I said should raise a new idea, or trigger that idea you had in already to be raised here now. . .I have a feeing from the responses in the past to this day that there are a lot of AIMers that feel that the standard AIM is not an optimum investment machine and that is why there are these “derivatives”. Before getting to your idea on the PC-alternative I want to address something I have frequently thought about an have mentioned this here, but in that I am not alone:
As long as one is not considering investing 100% of available capital at the start of a portfolio then no matter what algorithm one uses for trade calculations this method is generically AIM-like: It is IM. . .Investment Management. . .although not necessarily automatic management.
A lot of investment managers increase their "liquid asset" positions when prices are rising(either to secure profits or to make money available for new opportunities in the market). This is essentially no different than what happens in standard AIMing. . .even as an AIMer it can be profitable to spend some of the cash to start a new investment if you run into a good opportunity even though the price of the running portfolio has not changed. . . this would simply amount to de shift of the CER that would apply for a multi-stock Portfolio. The same thing as Rebalancing a single stock Portfolio. This just as a lead to what I mean in response to your idea:
A question arises: "What would be a generalised investment algorithm that uses various inputs from the market for calculating trade amounts? I know, of course, that this is an old question and that as many systems have emerge as there are people who think they can make such a system work better that anything else. . .so I am clearly not suggesting that we try to do this here. We have already developed many AIM-variants within the AIM-community and no one knows if it is possible to identify anyone as the best because these alternatives operate on different rules and have different boundary conditions.
The interesting question is:
When we look at the various popular systems that are in vogue(and I include systems that are not called "AIM" but perhaps should be called PIM or EIM or MIM. . . P=Personal and E=Expert and M=Manual. . .what ever one has) what would be the most identifiable features of all these programs that are more or less similar.
For example the Trade Advice Generator:
For standard AIM: Trade =(PC-a*V). . . .a = variable(or ab and as if separate SAFES are used for buying and selling)
PC2=PC1+0,5Buy
Plus some extra rules for when to update the PC and when not and for holding zone percentages, minimum trades and CER.
For Vortex AIM: Trade = (PC-V)*M M= 1/(b-1) or 1/(s-1). . . variables for buying and selling.
PC2=PC1+ b/(b-1)*Buy. . . .or PC1-s/(s-1)*Sell
Plus some extra rules for holding zone percentages, minimum trades and CER.
How do other investment system calculate the trade amount if they are ready to trade? Perhaps you might know by of course there are various ways of creating a Trade Algorithm. To what extend are these trading function different from the above?
Are some of them similar to YOUR idea of creating a variable reference system... the PC? Maybe you could find out to answer your own question
If I read you correctly you suggest this:
PC2=PC1 + Trade. . . .Trade being a positive for Buy and negative for Sell
Buy Amount= Buy/Price. . . . price is low
Sell Amount=Sell/Price . . . price is high
Remark: This looks very much like my Vortex AIM, except that I use at first fixed Tade Multipliers based on how aggressive I want to trade. This allows me to trade aggressively or very conservatively. . it is my choice.
Your idea will result in the following:
1 Increase sharply the amount of the buy and the sell. . .
2 As the equity is sold off The PC-value drops rapidly and the equity Value drops rapidly as you sell aggressively at first, so the value
Trade =(PC-aV)
becomes rather small and the trades rapidly deplete the stock at first as the price rises, but then the trade sizes taper off and creates a stagnant portfolio with mostly cash in it. This is an accelerated form of standard AIM, which is considered undesirable and Vealies have been created for that.
As the prices drop the PC drops rapidly as the Buying is rather aggressive . . .more aggressive than you would want. . .It results in a high Cash Burn Rate and depletes the cash maybe too early.
To compensate for that I use in principle the idea that I if see things going the "wrong way". . .too rapid a cash burn. . .I then change the aggressively of the trading by adjusting the trading variables so that the trades become smaller. So in essence I use this in practice:
Trade = (PC - V)*M with a variable "M”: . . .as I see fit for a particular start for the trading. Then, if I want to reduce the trade sizes by "interfering" with the “automatic” part of my AIM, the PC updates are updated with smaller trade amounts and so the total aggressively of the trading is reduced that way I want it. . .if I know what that is. . .if I don’t I can still reduce the trading aggressively to play safe:
Buying-in then slows down, conserving cash
Selling-off then slows down, conserving equity
In order to do that with Standard AIM you would need to do this:
Trade =(PC-aV)
PC2=PC1 + b*Buy
and consider "b" as variable that you change as you see fit in midstream as the price changes (interfering with you AIM based on good judgement).
You could start off with b=1 at the midpoint of the Trading Range and reduce the value at the price moves away from it. . .how you do this is less important that the fact that you want to slow don the buying towards a DIP(holding on to the cash) and to slow down the selling towards a Peak(holding on to the equity).
This scheme would very much be similar to use a Ladder System as Clive(Is775) has suggested and as I have discussed before, but the reductions of trades towards the limits of the Trading Range would mean the very opposite to the Progressive Ladders as I proposed. I proposed that to invest more effectively by concentrating the trading close to the Trading Range Limits.
In any case the specific preference of what you want will dictate how the trading system will look like. . .you are the creator.
So the idea of creating a Generalised Optimised Trading Algorithm will not come to pass as long as investors implant they Personal Whims into an algorithm. .and many AIMers use the personal whims Lichello put into his AIM
In the end a System is going to function exactly as the Creator Desired it. . .and the critics will find all sort of things wrong with it as they have different desires and whims for their Investment Machines.
This al of this is of course quite apart from the question if using a 50-50 CER for a new AIM is a smart thing to do or not, and I have decided on this issue as follows
1. If one is ignorant, it would be a smart thing to start all his AIMs with a CER= 50/50
2. If one is very smart it would be a stupid thing to start all his AIMs with a CER = 50/50
