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Demo0. KeepDreaming

Hello,
This demo gonna be like a stress-test to some of my manage criteria in a simple way. And try to prove the point that, with a conservative start and managing the risk, it’s hard to make a mess.

I want to keep my lost aversion under control.
I don’t expect profits (random Darwins, but who knows…), only don’t make a mess.

RULES:
Selection criteria are not allowed.
The management must be for a B&H portfolio, trading approach is not allowed.

10K; Leverage x2; 10 Darwins

Darwins:
Filter “NEW” + Exp<2 + TR<3 months (future performance random) + zero info available form provider (as maximum only posted at description) + 0 investors
*Only 1 Darwin by provider allowed
The first 10 with this criteria:
DYU FLQ KEA KHL MZO PWQ QRK WDE WMI ZUR

Look “inside” the Darwin is not allowed during all the test.
If a Darwin is closed or abanoned (1 month without activity) I will sell it and select a new one (if the closed p/l is <0 it will be “transfered” to the new one).

The test is failed if, at any moment:
EQ <8K (-20% loss); but is expected significantly less due a conservative management aproach
Any Darwin has: closed p/l + open p/l <-200 (-2000/10)
*Flash-carsh events tolerated, that’s a mistake due a poor selection criteria,(not allowed in this test).

My main idea in order to success:
Large SL (like a firewall, around -25% DD). Small enries on DD’s averaging down using pending orders (oviosuly with potential lost predefined). Upscale on futures DD if the Darwin makes news highs and I’m able to rise the SL. Not risking all the -200 at the first try, in order to, if the Darwin touch the SL, have the chance to have a second try (only if the Darwin deserves it and seems it’s solving the problem). If the Darwin is making profits, at highs sell and buy again in order to leverage them and upscale on futures DD.

The test will end when:
All the Darwins reach their SL. The results will be evaluated.
If selling (at any time after 6 months) all the active Darwins in the quote of their SL it would generate profits to the portfolio (the test is valid).
*I won’t be managing the test forever, if the fact that I reached the target is obvious, I’ll end the test.

The demo starts this weekend.

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Such a full-scale experiment :sweat_smile: !

Wish you the best !

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It’s obvious to me that the key to avoid the failure of the “test” is the money management (fit the size of the entries to the enter/exit levels, in order to not exceed the maximum potential acceptable lost, and upscale only if I have margin).
How good/bad are the rest of the rules (selection, timing, risk and optimization of the portfolio) are irrelevant for the purpose of the “test”.
This topic is not to debate about pros and cons about money management, but I think thaht underestimate this “tool” is one of the causes of some shared portfolios losing too much (according to the opinion of the investor).

Before posting the first update I want to post my noob guidelines (they’re only FOR ME) related to the “motivation” of this demo: first aproach to darwins investment and expectations.

  1. My attitude will be: if the portfolio makes profits, ALL the merit belongs to the darwins and the providers. If the portfolio loses, ALL the guilt is mine.
  2. I need mental stability (I don’t want to feel negative emotions) in order to not make huge mistakes.
  3. It’s essential to know which is my limit of lost/risk (and try to manage in order to avoid achive that limit).
  4. A Darwin is a new asset with a lot implicit uncertainty. “Bad phases” (situations with low teoric probability, or simply unforeseen) soon or late will come. So underestimate the probability of them and don’t be ready to deal with them is a mistake.
  5. It’s better for me start conservative (avoid being in a potentially “catastrophic” situation), and evolve my management progressively (more deatils will be in the nexts demos).

This is just the “theory” (Alice in wonderland). The reality will be cruel.

Thanks for reading, feel free to do constructive criticism (trolls and spammers will be ignored).

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JULY UPDATE

Resume:

2 entries (averaging down): FLQ MZO QRK ZUR
1 entry: KHL PWQ

DYU and WMI have been adandoned, and haven’t given any entry, so I’ve discarted them and selected 2 new: MLM VTO

Actual:


Potential teoric lost (investment, average quote, SL):

FLQ: -94,47
QRK: -91
ZUR: -90,25
MZO: -90,27
PWQ: -44,94
KHL: -44,91
Portfolio: -455,84

The portfolio is very young and under construction.
Considering the remaining liquidity and the actual VaR (around 1%), the volatility is very low. Performance data: (max: 0.53%; min: -0.32%; actual: -0.28%) .
Zero sell orders have been executed.

Posting an screenshot of the portfolio or of the closed p/l has zero interest for now (at least for me, if you want to see it just aks for it and i’ll post it/them). The same for if you want to see the scpecific timing and evolution of any darwin.

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AUGUST UPDATE (sorry for the delay, busy week)

Resume:
Only KEA hasn’t given entry yet. The rest are (still) in DD mode (some are in range, others are close to the SL) and don’t accept more investment (the potential lost of each Darwin is -90 aprox).

Actual situation (8/9/19):
VaR of the portfolio: 1,48% (it’s approximate, correlation between Darwins is N/A due too short track record).
Potential teoric lost of the portfolio (all Darwins touch their SL and none of them deserve a second oportunity): -816,92 (-8,17%).

Some ideas:

  1. How is performing the portfolio it’s not “nice”. But: a) only 2 months and 2 weeks b) I’m buying during a DD, and I don’t have a “magic rule” to buy just before the start of the recovery (?, random Darwins). So it’s time to wait and see the evolution.

  2. There’re some pairs of Darwins that are performing in a very similar way. It’s too soon to say that one of them should be discarted (criteria of selecting/discarting Darwins are not allowed, but analize the effect of correlation can be interessitng).

  3. I want to say that I don’t like the actual rules of the management (are just some simple rules in order to make effective money management). I think there are concept errors and a lot of margin of improvement. But another purpose of this experiment is start with simple rules and change them (once the mistake/decision has been done) to the rules I’m using in my “real” demo.
    Befor the first update (timing of entry) I will wait to make at least one entry on KEA, but I advance that a rule like “wait to X% of DD (or aprox) and then buy” it’s not good enough (obviously it’s just my point of view).

SEPTEMBER/OCTOBER UPDATE

Resume:

KEA had a small DD (-5% aprox) so I could buy a little (was the last darwin in “waitning for a DD” mode). Since then almost every day has done a new ATH.

4 darwins reached the SL (at -25%DD from ATH):
MZO (-88,66, low odds to have a second try, actually is at -40%DD). QRK (-89,08,sold at the lowest and have recovered a significant part of the DD, probably will deserve a second chance). ZUR (-78,55, sold 2 days ago, to soon to make a decision). PWQ (-86,64, sold at the lowest and recovered a little, almost 1 month without trading and his Equity is zero, so I assume the trader has given up, so discarted).

PWQ has been discarted, so I had selected a new random darwin with the selection rules. ITN (in “waiting for a significant DD” mode).

The others darwins are still in the same DD (no new ATH, neither reached the -25%DD SL).



Actual VaR 1,18%

Closed P/L + Rebates(+) + Performance fees paid(-) = -345,04 + 20,83 - 0 = -324,21
Potential increment of the closed p/l (invested darwins touch the SL, with security margin for negative divergence and bad execution) = -490 aprox
Total= -814,21 (-8,14%)

My thoughts:
This part is a detailed reflexion about what happened, possible causes and possible improvements in the management. If you’re not interested don’t waste your time.

In absolute terms the actual performance is precfectly tolerable, but considering the low risk, low VaR, low ratio invested/liquidity the problem is evident. In my opinion there are different causes:

  1. The darwins selected for the portfolio. It’s rasonable assume that with the actual selection criteria (“NEW” + less than 3M of TR + Exp<2 + unknown trader) the probability of selecting a non invertible darwin is high. Add to this the filter “NEW”, by default, list the darwins by return, so when I select a darwin normally had been performing well (so more odds to start soon a significant DD).
    Only KEA is the exception (at least till now), the rest suffered at least -15%DD from ATH after the first buy.
    When I started this experiment I was aware that this could happen, so I’m not going to change the selection criteria (the process was/is: select a darwin, if it’s good it will remain, if it’s bad will be discarted and select again. the bucle will continue till all darwins are good, and meanwhile assume low risk. This is the “ideal” way, maybe I will be tired/bored before…).
    But what happened suggest that implement some criterias in the management in order to take defensive decisions if a darwin(s) are having a too much negative impact in the portfolio wouldn’t be a bad idea. I’m not going to implement that yet, it will come in futures updates.

  2. The exit rules. This is a problematic criteria, when sell a darwin? In this experiment the trader is unknow (uncertain about his/her talent to solve problems) and it’s not possible to “look inside” (trading journal, VaR/Rs, evolution of the scores, etc…), so I have to make the decision only looking the TR. But the TR are short (the longest has 7M), so it’s not possible to have an idea of what’s the “normal size” (and also I don’t like this approach, I don’t think that a “past normal DD of X%” it’s extrapolable to the future).
    Considering this, I started the portfolio with a standard SL at -25% DD (with a fixed target VaR of 10%, not tolerate at least a -20%DD it’s a nonsense in a B&H portfolio). I was aware that in some cases would be a good decision (MZO case, actually -40% from ATH) and bad decision (QRK actually -15% from ATH).
    So I was aware that a significant number of darwins could reach the SL (point 1), and maybe some of them could recover. That’s why I decided to not risk all at the firts try, to assume less potential lost and have a second chance with those that survive (missing a significant part of the recovery).
    Although the reasoning has some logic, a “sell low and (maybe) buy high” sounds a mistake. So in this expereiment the SL should be used to make a defenity discard decision, so rise the SL wouldn’t have been a valid solution in ordert to make less problematic the past bad performance of the portfolio. But before evolve the exit/re-entry rule, I want to “complete the mistake” (with a little of luck I will re-buy QRK next motnh).

  1. The timing of entry. Buying at highs doesen’t seem a good idea (specially with my selection criteria, maybe one of them will be the new HFD, but I don’t think so). So if I want to buy in a DD, have a good timing will be ideal. It’s impossible for me to buy at LOW, so I’m happy with a good average quote of entry (if the DD is small assume a small % of the increment of lost availavle, if the DD continues asumme more %).
    Till now I had a simple rules: at -5%DD BL order assuming 50% of the lost availible and at -10%DD BL order assuming the rest [I sarted with -7.5 and -12.5 with the first 2 darwins, but I changed because I wanted to make the firts buy sooner, thats why FLQ has more investment (has a better average price assuming the same lost). It’s interesting to check the effects of this small change: FLQ and WDE are in similar situation right now (-15,13%DD & -14,73%DD) and the open p/l are -0,64% and -7,3% (with +2,5% and -0,07% of divergence), so even discounting the efect of the divergence the consequences of having a better timing are significatives].
    Although I think the main cause of what happened to the portfolio is related to the point 1, would have been possible obtain a better timing of entry, and that would mitigated significantly the bad performance.
    Criteria improvement: work with BL orders in fixed levels are discarted (if a darwin is in DD with an interesting price could be a lost oportunity if the BL leves is not reached; and choose only 2 fixed leves discretionally is too random).
    I want to start buying even if the DD is small (even if the increase of the investment is small, I don’t want to feel that I missed an oportunity). I want to be “full charged” (assume all the available lost) only if the DD is really significiant. So, provisionally, the range will be between -2.5% / -15%. Meanwhile the DD is small i will buy direct to market, if the DD starts to be interesting I will work with BS orders (trying to follow it during the fall without buying). The % of the assumed available lost will depend of how deep is the DD (considering the provisional range).
    This criteria should be more efficient with volatile darwins (with drodawnless darwins like HFD or ERQ wouldn’t be an interesitng rule of entry), but considering my selection criteria it could work, so this evolution of the rules of entry starts today (although for now only KEA and ITN can be increased).

I will update the topic when somthing “interesting” happens.

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NOVEMBER/DECEMBER/JANUARY UPDATE

Discarted darwins;
MZO/ZUR: had been definitely discarted (they’re still in the DD and reached at least -40%).
FLQ/ITN/WDE: the trader had given up in his first DD (EQ=0; before reaching the SL).

New and discarted:
BQK: some boughts done and this last week the trader gives up (EQ=0). Will be sold on monday.

New darwins:
QRK*: already in the favourites list, I think it deserves a second chance (sold at -25% and has done a significant recovery).

BNF/VMS: some bughts done.
EDH/HSB: waiting for the first entry (with new version of selection criteria).


Actual Var: 1,18%
Potential final performance (closed p/l + rebates + PF paid + potential colsed at SL (invested darwins)) = -10,17%

My thoughts:
This part is a detailed reflexion about what happened, possible causes and possible improvements in the management. If you’re not interested don’t waste your time.

Due to the potential final performance (-10%) is aprox the half allowed (-20%), it’s time to analize and make improvements.

The target of this portfolio was (and is) choose random darwins, the survivors remain and the losers are discarted and replaced by new random (It requires to try a high number of darwins before find by luck one winner). Being aware of the potential high rotation menwhile the process of “searching the good one” lasts, it was (and is) necessary start conservative and assume low risk to avoid a disastrous performance.
Another target was (and is) start with simple rules of management (risk/timing), make what I think that are wrong decisions (expected and unexpected) and show them and evolve the rules to my actual management (that I’m doing in other portfolios). But, I need a winner portfolio if I want to evolve the managament or, at least, a not sistematic loser.

What happened:
Till now I have tried and discarted (with losses) 9 Darwins, but only 2 are clear losers (ZUR and MZO), the others simply had been abandoned in their first DD.
And my impressions related to the 7 darwins that I’m actually invested: I think only 2-3 maybe will be able to solve their actual DD, the others probably will be discarted soon or late (with losses).

Note 1: Only 2 Darwins had suffered a significant DD (let’s say -7,5% aprox) and made new ATH BEFORE I made the first buy (that’s probobably because the rule of “lenght of TR < 3 months”). It implies that I started buying a Darwin in his first DD with a really short TR (a risky decision!).

Note 2: Only 1 Darwin had made a new ATH AFTER the first entry: KEA, first buy at -5,5%DD with the old entry rules, now is in -12% in another DD and I will be really surprised if the trader solves it (EQ=joke, poor La and Cp, Rs “meh”, the trader has 9 darwins and his nickname is “inexperted78” :bomb: :man_facepalming:).

Posible reasons of why the majority of the selected darwins “had given up in their first significant DD” (the main problem till now):

  1. Really low Equity accounts (<1K). Posible sign of a noob trader and/or lack of trust in the strategy.
  2. Too many darwins. Posible sign of a trackrecord farmer (some can be included in “1”, but a provider with 8 darwins, all of them with 1K, but with a VaR of 0,5% for me it’s also suspicious).
  3. Bad Rs. Posible gambler.
  4. “Kamikaze” VaR. The Darwin is in a “normal DD”, but the DD of the underlying account is a disaster.

There may be other reasons, but in general the discarted darwins (and some of the actuals) had one or more of them. I know there are successful darwins with some of them, but I think they are the exceptions, and invest in a darwin with short TR+unkown trader+ one of this signs it’s just gambling.

What I’m going to do:
Now I have 2 options:
A) Keep doing the same, and each time I discard a darwin and select a new one reduce the risk assumed for the new darwin (if I want to avoid a -20% performance meanwhile I survive selecting a bunch of bad darwins it’s the only way). The main problem is: it will be necessary a lot of time (maybe years)…
B) Modify the selection rules, trying to avoid darwins with high potential to be dead in few months.
The point of this option is keep the randomess in the process of selecting, but without making stupid selections.

I prefer the second option, it implies a little intervention by me, but selecting again and again new darwins that I wouldn’t invest even drunk it’s getting boring.

So the uptdated rule of selecting new darwins:
Default filter “NEW” (ordered by default) + the first darwin that has:
a) Unknow trader (and now I won’t discard if it already has investors).
b) Equity and equity at risk (Equity*VaR) are not a bad joke (the trader trust the strategy with his own money).
c) No kamikaze/dangerous VaR (no undercapitalized darwins).
d) No trackrecord farmer (I will check the length, the equity and equity at risk of the others darwins provided). And none of his others darwins can had been closed in a DD with investors on it.
e) VaR of the underliyng strategy moves in a defined/stable range (the trader has well defined wich range of risk he feels comfortable) (no noobs and clear gamblers).
f) If La or Cp are “RED”, must have “GREEN” Rs.
g) The darwin must have suffered at least a 5,5-7% DD (aprox) and after did a new ATH (all in NATIVE trackrecord) (the restriction of maximum lenght of TR is removed, and now I allow migrated darwins).

If a Darwin is selected and in the future won’t pass the rules, I’ll keep it.
With this rules I’m not trying to select good darwins, I’m only trying to select darwins randomly with a minimum of potential, or at least select darwins that won’t be abandoned/dead in few months.
T
he actual 7 darwins invested remains.
3 new should be selected with the new criteria. Only 2 darwins of the “NEW” filter fits the criteria: EDH and HSB. I’ll check weekly the filter till I find the one that is missing.

About the managing:
Due to the new change in the Risk Manager, the “expected normal DD” in a Darwin should be smaller. It implies that the SL and the range of levels of entries could be tighter. I’m going to do that, but just a little bit, because I don’t have data for real behavioral expectations.

Entry rules:
The past update of the rule of entry (fixed sizes in fixed levels discarted -> wide range of levels on the DD and size in fuction of the % of risk previously assumed and of the margin of fall available) has permitted to get a better average price of entry, be better positioned in case of recovery and avoid assume the maximum risk prematurely (with the previous rules the performance of these last 3 months would have been worst).
I don’t expect updates till the update of the risk management.

Exit rules:
As I said in the previous post, sell a Darwin because it’s performing bad in some darwins could be a good decision (MZO and ZUR), but also can be bad (botton seller with QRK). MZO and ZUR had been definitely discarted, but I re-bught QRK because I think it deserves a second chance. But I’ve made the “mistake” of “sell low and rebuy high” (missing part of the recovery). I don’t like it, so the criteria of “not risking all at the first chance in order to, if the darwin reaches the SL and recovers, have a second opportunity” is discarted. Won’t be a second chance anymore, but the SL will be more tolerant and the total risk/potential lost availible for each darwin will be progrssively decreasing in function of the rotation/number of darwins discarted of the portfolio.
Note: the SL will be more tolerant in terms of fixed VaR at 10%, then will be corrected to the new risk manager conditions.
The rest remains the same. I don’t expect updates till the update of the risk management.

Risk management:
No news. I don’t expect updates till the portfolio makes profits (fingers crossed), or the proportion of survivors in the portfolio increase, or I have a better vision of the effect of the new Risk Manager.

I will update the topic when somthing “interesting” happens.
Thanks for reading

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It will be a very long run.
Darwins with a real alpha are very difficult to find, I think it is impossible with random picks and waiting for survivors.
It is a needle in the haystack, 99.9% are just random walks, even when they show return it is almost always luck + hindsight .
The risk manager always improves but will never turn luck into alpha.

Hi @CavaliereVerde,

You’re absolutely right. I’m aware that I should be really lucky with random picks, and it could take years. And proably the portfolio will continue losing.
As I said in the first post:

I don’t want to disclose the future changes and others targets of this portfolio yet. I’m waiting to be at -10% or potential final lost -20% or 10 darwins discarted with de new selection criteria (I excpect this in 3-6 motnhs). The time required to manage it it’s perfectly acceptable (posting the update requires much more than all the management done).
And manage a losing portfolio it’s not depressing me (thanks to my others tests that are working well, at least till now), so I’ll weep on.

The reference to the Risk Manager was related to ajust levels and sizes of entries and level of SL (risk management update), I neither expect to convert a loser to a winner.

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