Search | User Listing Vidsite | Calendars | Quotes
Home Page ->  OT ToolBox Modules -> Group/ETF Trader -> View ThreadLogon (or Register, or Join TradeTight)

You are logged in as a limited-access Guest.To join TradeTight, first read the info in the Organization & Content room, then click the link above. 

Psalm 128:1-2 (NKJV) … Blessed is every one who fears the Lord, who walks in His ways. When you eat the labor of your hands, you shall be happy, and it shall be well with you. 


Sticky Use GT Correlation to Manage Diversity
Jump to page : 1
Now viewing page 1 [50 msgs/pg]
Jump to room :
JimDean
Posted 10/22/2010 12:20 PM (#1137)
Subject: Use GT Correlation to Manage Diversity



Owner/Admin

Posts: 3925
2000100050010010010010025
Location:
USA: GA, Lawrenceville
Let's say that you have a focus list in which some (or all) of the symbols have signals on them (or some other thing has brought them to your attention). You need to decide which ones to trade, but you want to make sure that you don't pick several symbols that are highly correlated ... you want to maintain as much diversity as possible in your portfolio.

Here's how you can do that with Group Trader.

1. All the symbols you are interested in need to be in the same Focus List - build a special My Symbols list if you need to. Sort it however you want ... you can have extra symbols in the FL if you want.

2. Highlight-select all the symbols in the FL that you want to check against one another, using Click + Shift-Click to grab a series of them, and Ctrl-Click to add/remove singletons. If you're considering the addition of these symbols to your current portfolio, then include your portfolio's active-trade symbols in the list. Important for later: to keep track old vs new, check the "Good Opportunity" flag for those ALREADY in-trade.

3. Right-click in the highlighted area, and click "Save as Group". You need to assign a Custom Group Symbol which always starts with a period, and give that symbol a memorable name. I suggest you include the date as a part of the name, such as "StrategyA Candidates 22oct10".

4. When you click OK, those symbols fill the Group pane, the new Custom Group Symbol is added to your FL, and the chart plots the average price & volume for the composite symbol. If you started off from a fixed focus list such as an Index or one created by an OmniScan, then the Custom Group Symbol will be put into your My Symbols list ... and the displayed FL will change to My Symbols.

5. The Group table will have defaulted to Correlation analysis, comparing each symbol with the composite group symbol. Since you are not analyzing Signals for this composite-group, don't bother with the Settings. Sort the group table by Ascending Correlation ... that is, the LOWEST-correlated values should be on top (small CORR column values).

6. NOW ... work your way gradually down the list, looking for the "Candidate" symbols that do NOT have Good Opportunity checkboxes on them. Those with LOW correlation values would be GOOD to add to your portfolio, all else being equal, since they improve your diversification. CHECK any Candidate symbols with "low" correlation of less than 0.5 or so - these are poorly correlated with your the others.

7. Once you've done that, go back to your main focus list and sort it by the Good Opportunity flags. Highlight only those symbols (using Click and Shift-Click), and repeat step 3 to create a new (smaller) Custom Group with a different name.

8. Click on the Charts button and set up the display to show a comfortable layout ... note that these multiple charts are on the Groups tab on the far right side ... to see the regular one-symbol chart from the focus list, click on the Main tab. If you have a lot of symbols, then you can use the left and right arrows to move through them in "baskets", in order of the current Sort. If you change the Sort, click on the Charts button again so that the symbols on the top are always in the Groups-Tab basket #1. Note that the Custom Group Symbol is always plotted in the top left of every basket, for easy comparisons.

9. If you have a lot of new Candidate symbols that you'd really like to add to your portfolio, but you don't have enough money to cover them, then sort the CORR list in DESCENDING order (highest on top), and look for symbols that are NOW in-trade that are HIGHLY correlated ... all else being equal, these are good candidates to close out, so that you get cash avail to open the new positions. By closing them out, you will improve diversification.

10. From this process, you now have a list of Candidate symbols to open trades with, and current in-trade symbols to close out. You should of course consider other factors such as risk and reward, current profit in trade, etc ... but this analysis will give you some additional "bias" to fold in to your decision-making.

Even if you don't use any of the other features of Group Trader ... this capability makes it worth purchasing, in my opinion.
Top of the page Bottom of the page
JimDean
Posted 10/22/2010 2:09 PM (#1141 - in reply to #1137)
Subject: Use GT Correlation to Manage Diversity



Owner/Admin

Posts: 3925
2000100050010010010010025
Location:
USA: GA, Lawrenceville
Duxx replied (moved here) ... this is the Group Trader room ...
Quick question on correlation: How many bars the correlation in GT is usually testing?

For my learning: let's assume I have 4 stocks in the portfolio, and then I create the Group for this stocks... then the correlation tells me that 3 of 4 have correlation lower than 0.50.

But since 75% of the stocks are no correlated to the GROUP, seems to me that maybe they are correlated to each of them ( the three)? I have always understood well correlation between one and another variable - I get confuse when you have more variables (or stocks in the equation).

Thank you again- this was very useful


Quick answer ... not sure, but I think ALL of the loaded bars are used for correlation. To control it, change your Data Periods.

The correlation is determined against the AVERAGE of the stocks in the group. You could conceivably have ALL FOUR with poor correlation to the average, or all four with good correlation ... it all depends on the mix. And that, of course, is what you are looking for ... a group of poorly-correlated stocks.

This is not doing a multi-point correlation tree that examines each and every relationship. GT correl works simply:

1. create a "group symbol" dataseries (if one not already avail such as for ETF's and MG's) based on the simple mathematical average of the various prices and volumes for all components in the group, on a barbybar basis.

2. do a pairs-correlation calc for each individual symbol VERSUS that common group-symbol, and report the result in the CORR column.
Top of the page Bottom of the page
RoyWild
Posted 10/22/2010 2:21 PM (#1142 - in reply to #1137)
Subject: Use GT Correlation to Manage Diversity



Veteran

Posts: 210
100100
Location:
USA: AZ, Phoenix
Thank you Jim!...

Great process for portfolio management.
Top of the page Bottom of the page
Jump to page : 1
Now viewing page 1 [50 msgs/pg]
( E-mail a Link | Printer Version | Search Room )

Owner of site: Jim Dean -- Forum content is confidential, and may not be distributed without written permission.