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How to balance the portfolio for research purposes?


I have a system for determining when I want to buy / sell an asset, and I have written the code for it. The problem is that the returns and so on are highly dependant on the initial settings - how much cash to start with, how large positions to take and so on.

At the moment I buy or sell the stocks for $500 each time, and have $10k initially.

Important properties for me is that the approach is simple and easy to recreate, as I'm doing it as part of my studies. It should also be realistic, i.e. it should reflect what the strategy would produce if used in reality. Anyone knows what this is called (the determination of the size of positions, initial cash balance and so on), and how it's usually done?

  • I have 0-20 events per day, but I don't have to trade on all of them (it's not necessary to limit the position to 1/20 of the value.)

(I'm obviously not a student of economics or finance. I welcome any help from example strategies to keywords that I can google.)

2 responses

@Epic T., A common position sizing technique is the Kelly Criterion. Given a probability (edge) and an account size, it can help you determine the size of each trade (bet).

I created a simple KellyFormula test page in JavaScript that I've previously posted here: Kelly position sizing test page

And there have been other posts here about other treatments of using Kelly Criterion.

Thank you Market Tech. An interesting read.