~Russian Bear’Z Blog~

This article may be useful for those people who don t know anything about the concept of volatility as well as for those who have been trading Vega for a long time. Volatility is a fixed magnitude that reflects the price alterations and depends on the way we measure them. In contrast to ATR (Average True Range) volatility is an absolute magnitude. It means that if ATR is 300 per share of Sberbank and 0.1 per share of RAO EES it doesn’t mean that concerning Sberbank the risk factor is higher or lower as the main role plays a capitalization ratio. Thus, knowing this magnitude we can draw a conclusion on what asset the price is more flexible.

Volatility can be of two types – historical and implied. Historical volatility is such a volatility the estimation of which is carried out on the grounds of historical data on this asset. The implied volatility is such a volatility that will reflect the price of the last option deal with the near paying off and strike if we place it in the formula of Black-Scholes. Consequently, the implied volatility makes sense only if we for this asset the options are traded.

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Method Fixed Ratio developed by Ryan Jones, means that the ratio of number traded contracts, to an increment of the capital, should be to constants. It is the basic concept of a method! Thus, at use of a method, risks increase only due to the received profit, allowing effectively reinvestment the earned profit.

Such approach, first of all, is interesting to aggressive speculators who use buy-power and perform inreaday trading on sevral stocks.
This method has been modified and generalized up to a portfolio which is presented in Fixed Ratio Calculator.

How to use the calculator? First it is necessary to initialize initial data on which the method leans:

1. init asset – a seed capital. This value remains to constants during all time work of a method and never change.
2. leverage – a leverage of your broker
3. DD – maximal drawdown in percentage which you are ready to suffer on a portfolio.
4. ticker – the stock’s name.
5. price – the current price of stock, may be change a few.
6. dd– drawdown used strategy for a year, or critical stop-loss, may be change a few, in points.
7. shares – number of shares in conreact specification.
8. part – a portion of stock of money eauation in a portfolio, in percentage.

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GA4TS – is a dynamic library set aside for the optimization of strategies using one or multiobjective in TradeStation Omega (any version). The advantages of the algorithm embodied in GA4TS are:

1. The possibility of searching multiobjective optimal solution (using Pareto Set).
2. The search is carried out with a help of Genetic Algorithm.
3. Greater speed of convergence in comparison with other methods (GA).
4. High accuracy of all calculations.

The library includes:

1. The library allows you to use all the opportunities of the algorithm.
2. The opportunity of the utilization by means of special interface in all versions of Omega TradeStation.
3. The opportunity of tuning and correction of the parameters of the reproductive cycle in the Genetic Algorithm.
4. The addition of good and well-known decisions into the basic population.
5. The bitwise accuracy of all calculations.
6. The filtration of data while outputting it.

The use of GA is justified in such cases when an enormous calculating capacity is required. And quick convergence allows you to solve the tasks amounting 10⁵⁰ in a several hours. The speed of convergence of this method is greater in comparison with other realizations of GA. As used here, the speed is understood to be the quality of the iterations done (calculations of one element or a strategy with specific parameters).

For that let s consider an example from MATLAB Rastrigin’s Function fig.1 in the description to “Genetic Algorithm and Direct Search Toolbox”. The function is:

Ras(x,y) = -(x²+y²)+10(-2 + cos(2x) + cos(2y)),

in which all the identical transformations aimed at presentation of calculations accuracy are done, as 1 +10^-16 on PC is 1 as a rule.
Fig. 1. Rastrigin’s Function.

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I suppose that I don t have to say that the market in Russia is the growing market of the developing countries as sometimes this market drops. And the thing that it is the trend market doesn t raises any doubts. It means that on the Russian market the trend strategies operate best of all.

The trend strategy operates in this way: when some fixed level makes his way the execution of the stop-order happens. Taking into account that the commission on the Russian market is rather small (0.05%) and the liquidity on many instruments leaves much to be desired it is very important how the stop-order will be executed.

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The question of the utilization of optimization for the strategies is disputable but I don t want to make you change your mind. I just want to mention that if you have invented some strategy without any parameters it will work only for having some historical data. And its impossible to draw a conclusion concerning its utilization. And having an assumption that some connection exists the dynamics of the alteration of the quotations with the past you can empirically select the best solutions (it can be either a single strategy or a set of it, reliant from the parameters). But there may be a situation when there are a lot of parameters or there are a little data under test, on which the resolution may behave aloof. It is examined by the carrying out the additional tests on other data.

Let’s examine in details the search of the optimum conclusion. It is obvious that the main objective of the quality of the strategy is a future profit that is why if you simplify the terms of the task by varying out the tests only for the historical data you must not be guided only by this single parameter as it does not reflect the main essence of the task. Thus, it is necessary to analyze such a criteria which can be regarded as a stable in respect of data. Such objectives are: Profit Factor, Drawdown, Percent Profitable, Ratio Avg. Win/Avg. Loss etc. But at the same time having obtained a conclusion which is optimum in respect of one objective it does not necessarily mean that it will be optimum for another one. Nevertheless you would like to solve the following task: to minimize the risk and maximize the profit at the same time.

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init asset leverage DD(%) asset
base max leverage limit current leverage

ticker	price	dd	shares	part	lots

1. init asset – the starting capital.
2. leverage – the leverage of your broker.
3. DD - admissible drawdown a portfolio, in percentage.
4. asset – the current capital.
5. base – the settlement value necessary for formation of the minimal portfolio.
6. max leverage – the maximal limit of a leverage without DD%.
7. limit – a limit on the open positions.
8. current leverage – current used buy power.

1. ticker - the ticker's name.
2. price – the current price, in point.
3. dd - the drawdown, in point.
4. shares - quantity of papers on one contract or not devisible value.
5. part – a share, in percentage, papers in a portfolio.
6. lots – quantity of contracts.

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