Tech Torque – Have A Plan

One of the advantages of using a quantitative trading system is that there aren’t a lot of day-to-day decisions to make about your trading. The basic plan boils down to “see the signal, take the signal. “ However, there are still times that we must do something a little different, and when those conditions occur, it’s best to already have a plan in place.

Sometimes we have to deviate from the basic plan because the system doesn’t behave exactly as we expect. An example is when a portfolio shows an entry signal for Symbol ABC on Monday, but then shows a “hold” for Symbol XYZ on Wednesday with no corresponding “sell” signal for ABC or “buy” signal for XYZ. This can happen when a small correction in the price data from our data provider changes the relative ranking of different trade candidates or whether a symbol satisfied all the entry conditions needed to generate a signal.

One way to handle this event is to simply realign your positions with the current portfolio holdings as quickly as possible. In the case above, that would mean selling your position in Symbol ABC and opening a new position in Symbol XYZ at Wednesday’s open. That’s how we do it in our own portfolios. Alternatively, you could choose to manage the trade on Symbol ABC yourself, knowing that there will never be an exit posted by the system, but then your results will also deviate from the published system results. The same would be true if you skipped the trade on Symbol XYZ.

How will you handle if you get a signals in Tech Torque but you are in the position in another strategy like Tech Comets? Cesar will still take the position because he is comfortable in taking the additional risk.

Another that we need to plan for is called “life.” Very few of us trade every single day that the market is open; we take vacations, move to a new home, attend to family matters, and participate in other activities that prevent us from trading. So what’s your plan when you’re going on vacation?

Our vacation plans usually go something like this. About a week before vacation starts, we stop taking new trades because those trades might not have time to play out before we leave. Meanwhile, we obey all exit signals for our existing positions, and then close any remaining positions on our last day of trading. That way we can leave for vacation with a flat account, and not have to worry about what the market’s doing while we’re trying to enjoy our time away.

Upon return, we have to decide whether to jump into any open positions shown by the system, or just wait for new entry signals. If the average hold time for the system is quite short, then we will usually just wait for new entries. However, if the hold times are measured in weeks or months, then we will enter positions for any open positions to realign ourselves with the system portfolio. Obviously there are more factors that you could consider here, like how long ago the entry signal occurred, how much the price has already moved and in which direction, etc.

Over time, you will discover other events that prevent you from perfectly executing the signals from a quantitative system, and that’s to be expected. The key is to have a set of rules in place that allow you to handle those situations consistently.

Make your plans now.
Cesar, Steve and Matt