Archive for January 21, 2014

Mean Reversion Stock Trading


dow_MRIn stock investing, mean reversion refers to the tendency of the stock price moving towards to its mean or average over time. In particular, when the current price is less than the mean, the stock is considered under valued and expected to rise. On the other hand, when the current price is above its average, the stock price is over valued and is expected to fall. Mean reversion trading is about trading strategies to buy or sell the stock when its performance has greatly deviated from its average. Read more

A Leverage Space Primer

An invited tutorial by Ralph Vince

Leverage space is simply a manifold, structured such that we can examine and discuss matters pertaining to growth functions of stochastic outcomes, such as processes of money management and portfolio allocations in the capital markets and gambling scenarios. It is a framework for observing and analyzing these functions, as well as drawing conclusions about how we manage these functions for our benefit.

Since growth functions are a function of time, much pertaining to what occurs in the manifold of leverage space is a function of time also.  Additionally, we examine what occurs therein in the asymptotic or long-run sense as well.

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How to use Kelly’s formula in practice

Three points

In our blog “Money Management: the best kept secret of professional investors,” we have emphasized the importance of Kelly’s formula in money management. In the meantime, we have also pointed out that the capital allocation suggested by Kelly’s formula is too risky.

So what should we do in practice? Here we shed some lights on this issue by giving a graphic illustration of the recent analysis of Vince and Zhu [1].
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Money management: the best kept secret of professional investors

Average log gain as a function of bet size

Watching CNBC you will constantly be bombarded with interviews of traders and investors. List of stock picks and expert opinions dominate the theme.

Putting the correctness of such expert’s opinion aside, the sheer single minded focus on stock picking is already very misleading. In fact, most successful professional traders and investors will tell you money management is an important component of their trading systems.
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