Monday, June 25, 2012

06/25/2012 correct ratios

The correct ratios for a hedged position are
110% long (XLF)
50% short (XLK)

For a cash only account the setting should be

60% long (XLF)

I increased my long position to 110% this morning, and have set orders for tomorrow to reduce my XLK short position to 50%.

The Mousetrap holdings are a bit tricky, since they are rotated on a fixed schedule (next rotation will be sometime close to July 6th).

There are two logical solutions:

1) Adjust the size of each stock I rotate into based on the correct long exposure for the full portfolio.
2) Adjust the number of stocks I hold based on the correct long exposure for the full portfolio.

Since this is trading I'll try for a third alternative...

In any case, a word about the portion exposure on the model.  In behavioral finance traders try to mean revert the broad market and end up doing momentum trading on their account.  If the market dips, they'll want to buy the dip -- but they end up piling on as they make money or selling positions as they lose money.

Both of those approaches actually lose money.

I've simply reversed the process.  I do mean reversion on the account and momentum on the market.

The math works.

But the proof of the pudding is in the eating.  It's a theory; it backtests well -- only live trading will prove the concept.

So, the Mousetrap is basically complete.  It's time to simply let some more months grind past.


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