May 11, 2011

I wanted to set one of the control settings, described in my Jensen Modified Sharpe paper, to the desired profit level. From the paper, it is said that you can preset the sum of profits generated. It is not said that you will reach them. The governing equation is dependent on the size and nature of the price fluctuations, and that cannot be guaranteed.

However, controls can be implemented in the “should prices move in such and such a way sense”, then the holding function can be scaled to reach profit levels. This is a remarkable attribute of the Alpha Power methodology. You want more profits; you pre-set more pressure on the holding function controls.

The chart below presents simulations done on the old WL4 website on May 10th. What can be seen is that as the control level increases, profits increase, as well as the number of shares traded. The control level regulates the holding function.

RIMM Model 1 Level 0 to 5

(click to enlarge)

The price series over the trading interval is the same for all. It is the trading strategy, the manipulation of the holding function, that will make a difference. In all these tests, the bet size was 5k for each trade, and allowing gradually more trades at each level produced higher overall profits.

Whatever the script I design, I often use a testing candidate. Some 6 years ago, RIMM could easily have been chosen to be part of a portfolio: it was only going up. However, over the last 6 years, RIMM has gone from a high of $ 140 down to $ 45. For someone wishing to trade on stocks that go up long-term, RIMM is certainly not the best candidate for the job. It should have been dumped already. Nevertheless, the methodology survived and produced scaled profits based on the pressure applied to the holding function.

Personally, I find the concept interesting.

Created on ... May 11, 2011,   © Guy R. Fleury. All rights reserved.