Saturday, January 5, 2008

Developing a Trading System

The Alpha Stock Model (ASM-10) is the core of the trading system being tested here. The ASM-10 portfolio is the "alpha engine" that primarily drives the portfolio's returns. After developing the predictive model to identify the next big stock market winners, my attention turned to risk management and how to determine the ideal long-short hedge allocation to be aligned with the market conditions.

The goal of developing a trading system is to consistently (systematically!) beat the market while managing risk. The system is optimized for risk adjusted return. Another goal is to make it easy to fine-tune in accordance with the trader's risk tolerance.

Trading System = Stock Selection + Risk Management + Market Timing

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