Be Ready for Any Market

How to Properly Assemble a Portfolio of Regression Based Strategies To Systematically Navigate All Market Conditions Andrew Falde

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• This material is being provided to you for educational purposes only. No information presented constitutes a recommendation by SMB TRAINING or its affiliates to buy, sell or hold any security, financial product or instrument discussed therein or to engage in any specific investment strategy. The content neither is, nor should be construed as, an offer, or a solicitation of an offer, to buy, sell, or hold any securities. You are fully responsible for any investment decisions you make. Such decisions should be based solely on your evaluation of your financial circumstances. Such decisions should be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance and liquidity needs.

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• No relevant positions

• Please note: Hypothetical computer simulated performance results are believed to be accurately presented. However, they are not guaranteed as to accuracy or completeness and are subject to change without any notice. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed; the results may have been under or over compensated for the impact, if any, of certain market factors such as liquidity, slippage and commissions. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown. All investments and trades carry risks.”

Disclosures

About

• Professional trader for separately managed accounts and hedge fund.

• Focused on algorithmic systems, statistical arbitrage, and options.

• Trading what I teach.

• Former commercial real estate broker, transacted over $250 million in investment and commercial property for investors, corporations, and lenders.

Fundamentals of the Markets

• All markets move in cycles (aka waves)

• Different types of instruments have tendencies to experience different frequencies and distances traveled in each wave

• These waves can be objectively measured in real time, without any prediction or hindsight involved

• There are better tools than traditional market indicators to accomplish this

Don’t Be Average

• With all the talk about moving averages, I have never once heard someone provide context about the historical benefit of observing average price… it’s all hindsight and limited observations.

Linear Regression in Practice

Statistical Analysis

• I’ve spent thousands of hours analyzing statistical market data and performing algorithmic studies on the major indexes, dozens of ETFs, and hundreds of stocks to match combinations of strategies and instruments that work together to create smooth portfolio based P&L curves

• Here are a few observations from these studies:

Observations

• Across the board, instruments tend to have 2/3rds of waves overlap and 1/3rd become a translation to new levels

• The size of the 1/3rd translation moves to new levels determines whether a reversion strategy or a trend oriented strategy should be applied to the instrument.

Trend vs. Reversion

• Instruments that tend to trend can maintain that characteristic for years and suddenly stop experiencing the extended moves.

• Stocks that remain range bound for years can suddenly become trending instruments.

• Broad based indexes offer the most consistent opportunity to remain neutral to contrarian since the diversification of strength, weakness, and stagnation of the individual components limits the number and size of extended moves.

Effective Measuring and Monitoring

• Linear regression studies and similar proprietary algorithms offer the most effective filter for determining if an instrument consistently performs best with reversion or trend oriented strategies.

• The ideal solution is to monitor, update, and trade the best performing strategies on the most appropriate instruments for as long as they continue to perform.

• This provides an all-weather approach that is not dependent on any one single type of market; is prepared to take greater advantage of what is performing best; these performing strategies should be expected to supersede the draw down in the strategies and instruments that are not performing at the same time.

Contrasting Performance for Smoother Results

Steps to Assembling a Portfolio of Strategies

1. A basic understanding of statistics

– Using statistical tools rather than simplistic/traditional indicators (regression vs. moving averages)

– Looking at hundreds if not thousands of historic data points rather than the last 5 or 6 examples

– Understanding sizing, draw down, and expectancy

Steps to Assembling a Portfolio of Strategies

2. A core strategy

– Simple to execute

– Develop the discipline to maintain positions to match the statistical probabilities

– An understanding of when the strategy performs best and what the limitations are (so you can select contrasting strategies to decrease volatility of portfolio returns)

Steps to Assembling a Portfolio of Strategies

3. Selecting additional strategies

– Similar strategies with different frequencies

– Contrasting strategies that perform best when the core strategy performs worst; all maintaining draw down that historically does not exceed gains in the other strategies.

– Nearly exact synergistic historical P/L curves

– Easy to execute or automate

Steps to Assembling a Portfolio of Strategies

4. Develop allocation parameters to further enhance strong performance and limit draw downs

– Example: neutral index strategies may be reduced or abandoned if volatility exceeds 30%

– Trend oriented strategies can be reduced or abandoned if broad market volatility is below 15%

Taking the First Step

1. A basic understanding of statistics

2. A core strategy

3. Select additional strategies

4. Develop allocation parameters

LRC Credit Spreads Course

The LRC Credit Spreads Course

• An introduction to linear regression and the 40 years of statistics behind it

• An 8 year back test with 1 year of trade by trade examples to provide the evidence that will increase your conviction in the positions

• Fully systematic entries, management, and exits which require zero personal interpretation and prevent over-management

• Low trade frequency so you can maintain your current schedule and add strategies without overwhelming yourself.

Take the Noise Out of Your Trading

They Reduce Noise By Adding

More Sound Waves!

LRC Credit Spreads Strategy

• The LRC Credit Spreads Strategy allows you to build that first wave which has a statistical expectation of positive results over time

• After you learn this strategy, you will be better prepared to learn and develop additional strategies with contrasting waves that will reduce the noise in your P/L.

Be Ready for Any Market

LRC Credit Spreads

Other Statistical Strategies (Swing, Channeling, Arbitrage)

Trend Strategies Short/Long Term

Allocation Strategies, Etc.

Questions

andrew@lessthanrandom.com