Reference from the tutorials:
Many trading algorithms have the following structure:
(1)For each asset in a known (large) set, compute N scalar values for the asset based on a trailing window of data.
(2)Select a smaller tradeable set of assets based on the values
computed in (1).
(3)Calculate desired portfolio weights on the set of assets selected
(4)Place orders to move the algorithm’s current portfolio allocations
to the desired weights computed in (3).
First of all I'll come out and say I'm new to this :).
I have difficulty understanding the concept of calibrating your portfolio which happens at "every" step sort to speak?
So let's say I'm going long in stock L1 and L2 and short in stock S3 and S4, which is my current portfolio.
The algorithm spots 3 new potential investments, how does it go from there?
It invests in all of them?
I assume not as the idea of the portfolio is to keep all your money in it, so it has to potentially go out of a position early?
At that point it checks then which of your current positions has the "least potential" to still make more money?
It does something in the line of: For all current investments compare expected expected returns vs expected return new assets.
And then swap out the one where the "new" investment has the biggest delta for?
Ofc taking into account transaction costs etc.
Thanks in advance! :)