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The roadmap of the trade :
The ML^2 solution : to gain the necessary intelligence to understand the full trade cycle = [analysis + selection] : [execution] : [exposure management] : [exit]
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What is the securities ‘nature’ : its inherent price path characteristics [persistent trending, mean reversion or prone to randomness] ?
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ML^2 tool : Instrument Trendiness
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The trader can select the instrument that exhibits their preferred style – a strong trending security, a mean reverting security or even securities prone to randomness – in how the securities price moves through time
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The momentum trader will select securities that are prone to persistent price characteristics, the high turnover will chose securities that have a tendency to persistent directional mean reversion and perhaps option traders to securities that exhibit mean reversion
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What is the security a ‘buy’, or ‘sell’ [based on the forecast ‘price path’ of the security - the current ‘state’] ?
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| ML^2 tool : Instrument Scorecard + Core Structure
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- The trader selects the instrument they are interested in [their own research] and the required information is listed in the scorecard
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ML^2 tool : ROI directional
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- Where the trader chooses the ML^2 program security selections – securities that offer the highest expected return over the next 20 trade days = long/ short/ mean reverting
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| What is the security at the start of, partway through or at the end of the trend or is the forward price pattern in a random state, or in a mean reversing state ?
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ML^2 tool : Core Structure
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The future state of each security, in terms of the forward price path = persistent long or short [early, intermediate, late trend time cycle], is the security in a random forward price path [unpredictable price path] or mean reversion [persistent long or short] where the securities price will tend to reverse within the trend but remain in the trend
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The trader can select the instrument that suits their trading style – trend following, counter cyclical trading, high turnover
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| When to enter the trade – the safest price in time ?
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ML^2 tool : Entry Point
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The current state of the securities price path will dictate if the trade is suitable for the trader at the current time - if the trader wants to buy the security
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The core structure will need to be persistent long and either early, intermediate or late in the price cycle – if the trader prefers a high turnover style within a trend then the preferred option is to select securities currently in a persistent mean reversion state
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The core structure tool will also list the number of days remaining in the trend
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So the trader can enter the trade at any time if the security is matching their preferred style characteristics
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| When to exit the trade ?
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ML^2 tool : Phase Transition
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When a security is listed as in phase transition, then the securities price path is about to change its state [the trend price path] – so the trader is given forewarning on when the price path is to change [usually between 2 – 5 days]
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Example : if the trader prefers to only trade long exposures they can exit the trade or hedge the long exposure and await when the instrument moves into the next phase transition to go long [from short exposure]
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| What the forward $value of the {security – portfolio} is expected to be ?
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ML^2 tool : Portfolio Monitoring, Sleep@NightLVR, APA portfolio monitoring
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The current $ value and the projected 20th day forward $ value of each security and the portfolio
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For a portfolio of securities, the trend state for that portfolio is indicated [so the trader will know what the trend of the portfolio is as well as each instrument]
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| When the securities price [path] is about to change [ahead of time] + the new future state of the security [trending, mean reverting, random states] ?
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ML^2 tool : Phase Transition
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When a security is listed as in phase transition, then the securities price path is about to change its state [the trend price path] – so the trader is given forewarning on when the price path is to change [usually between 2 – 5 days] ?
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The phase transition tool will list the new state of the securities price path {persistent long <----> [phase transition] <----> persistent short}
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The trader may choose securities in phase transition to execute trades from long trend to short trend picking up accelerated price movements [higher return per unit of time in the short trade]
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| How many days to the price trend or the time left in the trend ?
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ML^2 tool : Core Structure + Instrument Scorecard
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Lists the remaining trade days left in the trend
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Useful in determining the optimal leverage / target prices for the trade
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| The securities expected price path ?
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ML^2 tool : Price Path
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Lists the securities forward expected price for [high : low : close : random] – over the next 20 trade days
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Useful in selecting the trades target price [range] and stop loss [risk reward ratio]
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| The current profile of the trade exposure [how strong is the price trending at any point, or is the price trend strength weakening] ?
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| ML^2 tool : Core Structure – signal strength
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- Indicates if the price trend is getting stronger or weaker [and prone to reversal]
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- Useful in managing the exit point of the trend
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| The expected target price / the worst expected price – over the holding period?
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| ML^2 tool : Price Path + Instrument Scorecard
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Tables the price path of the security over the next 20 trade days
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Useful in selecting the target price, the stop loss and the optimal leverage for the trade
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Details the number of days to the chosen target price [trader can select their own target price]
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| => Risk Management : equity$capital@risk = alerted when the market risk profile changes such that their $capital is at risk of loss
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| ML^2 tool : Portfolio Monitoring
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The trader can determine their capital@risk $ – when the market conditions are expected to change, the trader will be alerted [in advance of the change]
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| => Risk Management : survivability : optimal entry price for the trade [focus on highly leveraged instruments]
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| ML^2 tool : Entry Point + Instrument Scorecard + Cash Buffer
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Details the optimal price range to enter the trade [leveraged securities] in the critical early trade time period in order to survive [in the trade when it goes their way]
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Optimal-maximum leverage [for no margin call] for the specified holding period – the trader selects the holding period and the cash buffer details the optimal leverage or required margin to maintain the exposure
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| => Risk Management : Control the downside : stop loss price benchmark
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| ML^2 tool : Instrument Scorecard
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Lists the worst price [lowest price if long / highest price if short] over the number of days remaining in the trend
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Example : if the trend has 9 trade days remaining , then the worst price over the coming 9 trade days is listed, given the directional exposure
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Useful benchmark to determine the stop loss price
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| => Risk management : optimal leverage : [from entry, through the trade cycle, to exit] <> sustained exposure with maximum leverage
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| ML^2 tool : Cash Buffer / FX Cash Buffer
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Selects the optimal leverage for the holding period – the no margin call leverage = the $cash buffer required above the $@risk benchmark
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The trader selects their risk profile [$@risk] and adds the cash buffer = optimal maximum leverage
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The trader can manipulate the optimal leverage [maximize the leverage] by selecting a shorter holding period than the period of time remaining in the trade – so the maximum leverage allowable can be achieved at a point in the trade cycle when the exposure is sufficiently ITM
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| => Risk management : changes to the securities volatility : when volatility is expected to spike higher or decline
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| ML^2 tool : Directional Volatility
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Details the current state of the securities volatility [historical standard deviation] and the future state [when volatility is expected to change – spike or decrease]
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Useful in option trading [option arbitrage]
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| => Risk management : what is the safe $margin level over the holding period ?
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| ML^2 tool : Portfolio LVR
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Indicates the benchmark $margin for a portfolio of instruments that acts as a cushion or buffer to remain in the trade
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The $margin will change through time indicating the risk profile of the portfolio = if the $ margin increases, the market risk profile is increasing as more $margin is required to act as the cushion
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