One Way To Enter And Exit Asset Classes With Models

Many people have the misguided impression that anyone that market times is either 100% in or 100% out of a market. Anyone that has successfully used multiple models knows that’s simply not the case. A long time ago we read an article interviewing Marty Zweig where he discussed that while he used timing extensively he was rarely 100% in or out. Since reading that we have found that it was excellent advice and have incorporated it into our trading.

As stated previously The Macro Trader uses multiple models for virtually every asset class. For instance in precious metals we currently run five models. Three are virtually 100% mechanical one is 75% mechanical and one is discretionary in order to build up a core position. So how do we position size this? Actually it’s pretty simple. We take our allocation to precious metals and divide it by the number of trading models, in this case five. So if for instance we have allocated $100K to metals each strategy gets $20K.

Why do we do this? Primarily for two reasons. We don’t know everything and we want to earn at least some of the risk premia built into each asset class. So unless we are extremely bearish one asset class and net short we will almost always have at least some money in play there. What about leverage you ask? Well we have rules built for that as well. Our use of leverage deserves a few of it’s own posts but basically if we are extremely bullish we will usually use options in order to lever up. Depending on the situation we might use futures for an asset class or margin in stocks but usually we like options to add leverage because we can usually control our risk better.

There are several other ways to use models such as ranking each strategy and putting X% in the top one, less % in the next, etc. We will cover more ways to position size each model in future posts but for the most part we have found that while you can make this as complicated (not to be confused with sophisticated) or as simple as you want many times simple works best.

Happy Trading,
The Macro Trader

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