Stocks & Commodities V. 25:5 (46-56): Managing Dynamic Portfolios by Kevin Morgan
Here’s how to build an automated trading system that reselects its preferred trading symbols on a recurring basis.
Computerized trading system development and execution platforms are oriented around trading a single or fixed set of stock, index, or commodity symbols. Backtesting, walk-forward testing, and real-time incremental execution occur against this fixed symbol set. Changing the set is a manual process, and the backtesting and generation of integrated results for a sequence of different symbol portfolios over time are not typically supported functions.
At the highest level of its design, an advanced trading system may utilize a methodology for regularly reselecting a preferred set of trading vehicles (say, stock). By adapting the preferred set of stocks to be traded, a more aggressive and adaptive “trade with the trend” approach can be implemented, versus using a fixed set of trading vehicles and waiting for them to demonstrate preferred trading behaviors.
On a weekly basis, the $pecial-K trading system reselects its preferred set of approximately 100 leading stocks from the NYSE, AMEX, and NASDAQ universes based on technical and fundamental factors. The approach is to trade short term, generating relatively small per-trade profits with a high win/loss ratio. The entry management logic focuses strictly on short-term price behaviors for entry selection. You achieve superior results by making sure your entry takes place only on stocks that show strong and consistent upward trends.