Peepal Capital

Of all the facets of System Trading Risk Management is the most critical aspect. This makes or breaks the overall system results. In this part I just want to share my definition of risk in investment. What is risk? In classical theory volatility is taken as a yardstick for measuring risk. But let's take a step back and try to define it. When do we say an investment is risky? If we know we might not get our principal back. Should that be the baseline? Maybe not because if I had kept that money in a government bond I would have got 6% annualized. So now my minimum base line is that the money I put in an investment should give me my principal back with 100% probability and  an interest earning of 6% on the principal with 100% probability  Can it give lower returns? No! I want this total return, as a GOI bondholder I am assured of this 6% unless the country defaults. Ok what is the probability of India defaulting? It is certainly not zero. So my overall f...

In this part of the System Trading series I will talk about how Buy signals are generated. Suppose we built a consideration set of 'n' number of stocks. And now we want to pick a smaller set for entering long trades. Assume this system is a long only equity asset class system. For assumption sake let us take the Nifty 100 (N100) constituents as the consideration set. As far as I recall these 100 stocks constitute approximately 75% of the market capitalization of India. Let us also assume we are building a factor system with certain characteristics as explained below: 1. Low Volatility - Primary Filter 2. High Returns - Primary Filter 3. Trend - Secondary Filter 4. Growth - Sorting Criteria 5. Efficiency - Sorting Criteria 6. Value - Sorting Criteria 7. Solvency - Sorting Criteria 8. Promoter - Sorting Criteria We simply calculate Sharpe Ratios of all stocks in N100 for a 365 calendar day period. I have taken this system as 365 day momentum which is get...

In Part 2 of my notes on System Trading I wanted to outline two high level but very important areas of a trading system. Disclosure: I will be mentioning stock names for examples. I have traded in all of them and hold a few as trading positions. This is in no way an advisory. This is for theoretical purposes only. In summary: System Definition: These are the underlying principles of the system Consideration Set: What instruments are considered to be traded System Definition There are many ways to make money. A fundamental pure value based approach can be called a system. A momentum based strategy of picking up stocks which are in top 25 of a list of 100 stocks in a time frame can be considered a system or picking stocks basis modified Sharpe ratios. There could be mean reverting strategies or breakout ones. And so on and so forth. But in the example which I will build on we will consider the following simple properties. Long Only - In this system we will be onl...

I have been contemplating jotting down all I know about system trading at a common place but never got around to doing so. So maybe in a series of posts I will try to delve into whatever I have learnt about mechanical trading over the years. Though currently I do not use this in my core portfolio there are elements of this I leverage for instance the way I do money management is directly from these methods. But first a disclaimer: Again this is a purely theoretical exercise and please do not take it as some form of financial advice. If you do so the risk and returns associated with it are totally yours.  Before you read on do spare a thought on Why do you invest? After thinking it over write it down. Investing or Trading is an endeavor with one sole goal that is to make maximum money with the least chance of going bust It is not an endeavor to be proven right. If that is the reason better to take up Economics. Have you even found an economist who thinks he or she was...