A.I.M. Users Bulletin Board

[Conrad]

Thanks Clive for your additional Remarks:

In Vortex I believe you set the Portfolio Control equal to the stock value after each trade. Under AIM if you buy 10% more stock value the PC is set to an amount half as much of that trade amount higher. When AIM sells PC isn't reduced but remains the same.


Indeed, that is correct. Perhaps some background on this is expedient as many current AIMers here are new at AIMing and have not been exposed to my discussions on it:

1 Setting the PC = New Equity Value is a consequence of my aversion to the concept that if and Engineer designed a Machine for doing something specific and then after the Machine is ready to go he routinely ignores its primary function, then I conclude that the specifications are wrong. A Trade Advice is normally meant to be followed-up and if a Residual Buy results at the same stock price as the Trade Advice was executed I consider it a Design Flaw. So my primary AIM was to get an Trade Advice Function that would give Trade Advise=0 at the Execution Price.

That is the Operational Logic of Vortex AIM Trading Advice!

The explanations became rather long in order to make my story lucid. I have presented the Full Story on my Vortex AIMing I-Hub Forum.
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=77378708
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Here are the essential paragraphs of it.
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Lichello originally formulated the AIM System like this:
Capitalization = 2000
PC1 = 1000. . .V= 1000

20%
Buy1 = (PC-V)
=(1000 – 800) = 200
Reserve =800
PC2 = 1000 + 200 = 1200
V2= 800+200 = 1000

20% drop
V3= 800
Buy2 = 1200 - 800 = 400
Reserve = 400
V4=800+400 = 1200
PC3=PC2 + 400 = 1600

20% drop
V5=960
Buy3 = 1600 - 960 = 640 <-----Short 240 already for the 3rd Buy !!!!
Effective Share Value Loss = 48,8 %

This bothered Lichello a lot. . .his idea had created a Cash Burn Rate that wiped out his 50% initial Reserve in a jiffy! . . .and he lay awake over it (at least so he wrote something to that effect). . ."How do I get around that problem???" he asked himself, and for some time he had no answer, until one day, quite a while later when he was driving around in the country side, he saw a licence plate on an old car in barn some place, with 2X in the number, and from that 2X he saw the solution to his problem in a flash(so he wrote) that his Buy Update was 2X too large. From that he decided to update the PC with 1/2 Buy and that would give a smaller PC2 and a smaller Buy2 and would leave larger Reserve for buying shares! . . .Bingo! . . .
He could still buy equity after an even deeper price drop would occur!!! Lichello had found his Cash Burn Brake!!!!
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Lichello, after having seen the old Licence Plate with 2X on it he realised, as if by Devine Inspiration, that he had updated the PC with double the amount he should have , so he setteled on this PC-update:

PC2 = PC1 + ½ Buy

To Lichello’s dismay the Cash Burn Rate was still too high to his liking. He pondered about this a lot in order to find a solution for it. In all this he had become so happy about his 2X - Revelation that he declared it Holy. . . .ponder ponder ponder. . .”How to Temper the Reserve Erosion without killing that Holy Thing?” . . .It did NOT cross his mind that he could use a different PC-update factor than the 1/2 to get a lower Reserve Erosion Rate. He did not, for example, try this:

PC2 = PC1 + 1/4Buy . . .or perhaps
PC2 = PC1 + 1/3Buy

No, it did not occur to him, for as I remember nothing of the sort in his book.

Lichello decided to invent a Safety Factor . . .he was a tinkerer after all. . .on the Buying Rate: “If I reduce the buying by a bit more then the buying should work out just about right. . .too much tempering is no good for it for then we miss the boat when prices rise again”. . .That is generally how Lichello told his story about it and how he came op with his 10% SAFE. . .still a very interesting development. . to say the least.

Behold, The Lichello Buy Algorithm was created

Buy = (PC-V) – 0,1*V
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2 After I had eliminated the Residual Buy Feature of Standard AIM and got my PC=V after every Buy, I had achieved the following:

PC2=PC1 + f* Buy. . .and Buy = (PV-V)* 1/(1-f). . . .with f being the variable Buy Aggression Factor.

Interesting to note here is that the PC-updating PC2=PC1 + f* Buy is precisely the solution Lichello failed to think of for finding effective braking on the Cash Burn Rate for the value of f=1 that he used originally. He settled on his Holy Update Number f= 1/2 as Brake#1 and when he found that the buying rate was still too aggressive he invented SAFE*V as Brake #2 to solve his problem!. . . .In Engineering we call that. . . . ehhhh. . . .Fudging
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I have decided that for the Selling I would use the same Trade Algorithm

Sell = (PC-V)* 1/(1-v)
PC2=PC1 + v*Sell

And here too PC=V would always come out of it, IF the Sell Advice would be executed.
Remark
With a consequent execution of the Vortex Trade Advice PC=V is the formal result. If however one would decide that the Advice would not be appropriate. . .for what ever reason. . .then the investor could execute a smaller or a larger trade. . .No problem to do that! Vortex would respond with a Deficit Trade Advice. . .simply reminding the investor that in order to follow the Algorithm the trading was not completed. The investor gets the opportunity to alter the Trade Aggression or to wait for the next price change. If he does that then the Trade Advice would be larger by the amount of the Deficit Trade Advice. This is similar in character to the Lichello Feature, except that in Vortex it is a specific result of NOT executing the specially designed Trading Function that would purposely give PC=V.
As Vortex is constructed I have intentionally removed the Deficit Trade Advice from the program and programmed in the PC=V after a Trade. The rationale for this is that . . .If the investor had a good reason to judge the Trade Advice is not appropriate then a Forced PC=V is the solution. He now has the Choice as follows: 1) The Trade Advice is shown that normally would give P=C after execution. 2) Should the investor decide to execute a different trade size then Vortex responds with PC=V as a forced alternative PC=V in line with the judgement of the investor. If this happens often then the investor can temper or accelerate the trading so that the normal Trade Advice is more or less in tune with what the inestor decides it should be. . .a conscious intervention becomes the basis for readjusting the Vortex Operational Parameters.

This gives me very flexible Trade Algorithms that I can set separately and I could set the Aggression Factors f and v exactly as I wanted them to be.

Aggressive buying + Aggressive selling. . . .Profit Reaping on a Trading Range. . .for Tigers!
Aggressive buying + Conservative selling. . .Equity Growth.
Conservative buying + Conservative selling. . . For the Scared that like Buy & Hold
Conservative buying + Aggressive Selling. . . .For letting the Portfolio serve as an Retirement Income Plan.

Also the f and the v factors can be used to adjust the behaviour such as Trading Frequency and Trading Magnitude in response to Equity Volatility changes. . .for a low volatility equity like SPY is now one can use a small Holding Zone and still trade quite frequently with good size Trades.

The one thing that with Vortex AIM does not occur automatically as yet is to achieve progressive Trade Size increases for trades moving towards the Outer Limits of a Trading Range. . in order to do that I would have to superimpose a Progressive Ladder Structure. . on the trading function, and THAT has been discussed exhaustively on this AIM Forum. I have not come to any easy automatic solution for that. I have struggled with that like Lichello struggled to invent his Standard AIM Algorithm. . .as yet I have not found a Devine Inspiration for the solution for it.

That is. . .I just got a Inspirational Flash on this . . .I have to let it sink in yet. . .I do NOT want to create a Vortex Flaw!