VORTEX AIMing

[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 Clive, 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 Advice is executed I consider it a Design Flaw. So my primary AIM was to get an Advice Function that would give Trade Advise=0 at the Execution Price.
That is the Operational Logic of Vortex AIM.

That I called the Residual Buy the Lichello Flaw was a Bone of Contention for some AIMers . . .Good discussions followed and the flesh on the bone was chewed off in time.
I have in the mean time become accustomed to call the flaw a Feature, although I remain to hold on to my opinion that Lichello had no prior consciousness whatsoever that this Feature would emerge in AIM. It was certainly not a specification. . .Lichello had few specifications at all. . only some hunches that he wanted to use the equity Price Changes to trigger his Trading on the bare bone wisdom of Buy Low + Sell High, and that the only market certainty is that equity prices would go up en down frequently. . . . .. . . .most of the time.

I have Read the 1977 Edition of Lichello’s book intensively. . .I was hell-bend on going to make at least 1 Million Canadian Dollars with AIMing . . . I had already read The Monet Spinner . . . and I remember well the "struggles" Lichello went trough in his effort to find what he was seeking. . .The Licence Plate with the 2X in it gave him the hint as to what to do, but before that he had settled(as starting-point for his “scheme”) on this Trade Advice Function:

PC2= PC1 + Buy

but he was very frustrated to discover cover that if prices dropped he saw his Reserve vanish like a Snowball in Hell, like in this Example:

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 he saw a licence plate on an old car in barn on a farm someplace, with 2X in the number, when he was travelling, and from that 2X he saw the solution, as if by Devine Inspiration, in a flash(so he wrote) that his Buy Update was 2X too large, so he decided to update the PC with 1/2 Buy and that would give him a smaller PC2 and a smaller Buy2 and would leave hum with more Reserve! . . .Bingo! . . .
He could still buy equity after an even deeper price drop would occur!!! Lichello had found his Cash Burn Brake!!!!

The real essence of this however that his Original Residual Buy. . .Original Sin ????. . . . was very large indeed and THAT was the Fly in his Ointment!. . . Lichello did not jump up and down at the discovery he had created a Huge Residual Buy right from the start of his tinkering (as he called it) . . .He did not at all discuss any Residual Buy at that time in his book, nor later, at least not under the name Residual Buy.

After he had created. . . I give credit where credit is due. . . his PC2 = PC1 + ½ Buy Lichello was a happy as a pig in a Barn Yard Mud Hole. . .He had found a neat way to keep MORE money in the Reserve and started to set up his AIM System and began various trial runs.

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, use 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 the book.

Lichello decided to invent a Safety Factor 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, as 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

Buy = (PC-V) – 0,1 Buy

I maintain that The Residual Buy, as it eventually remained as a Feature, was not an intentional design specification that Lichello had in mind. His Original Residual Buy was also Feature, but a disastrous one at that. Lichello either looked at it and may have excepted it as a little flaw in his Holy Buy Function. . . .in the spirit of Nothing is Perfect . . .or he never saw it until someone told him about it . . .and at a later date, when he was confronted with it, he sort of explained it away in a manner that it looked like is was a good feature, because it produced the Brake on too rapid a Cash Burning for his original Buying Function.. . .I can live with that.

On the fact that after a Sell Lichello did not update the PC I understand it as a Brake on Equity Selling in the spirit of keeping the Investment Base constant ( never sell more that the constant Equity Value you started with, and retain the Equity value after you have reaped some profit. . .no bone of contention on that!

2 After I had eliminated the Residual Buy Feature of Standard AIM and got 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 missed 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

Why did Lichello use 10% as SAFE? Why not 11,4 or 9,345?. . .He could just as well have used a variable f instead of 0,5 for updating the PC, and then he could have dispensed with the SAFE altogether and he could have use the simple Function Buy = (PC-V). . .period !

In any case 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 a 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 the 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 the solution for it.. .. .

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