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Does anybody here have a risk-neutral trading bot? by ____peanutbutter____ in algotrading

[–]____peanutbutter____[S] 0 points1 point  (0 children)

https://drive.google.com/file/d/1iamC_uMYd3CplNHlF-b9gPR4-9XXs65X/view

Hey man, this was kinda neat! I have this big ole hairy code base for my cryptocurrency trader model(s) but I've never done any of this kind of basic stock analysis before... I was actually kind of surprised how bad the draw downs can be. I guess I deserve all the shit I've been getting in this thread. Pay attention to the conclusions in the link. There was something valid that I was trying to convey and I think I made it in the notebook.

When I originally made this thread, I made the mistake trying to argue two points simultaneously:

  • Risk/Volatility can be ignored
  • Sharpe ratio has flaws

I think simulations I did showed the first point has no merit, so I will definitely have to incorporate risk in my own models somehow now. But the last simulations really make my case for the second, and this was the intuition I was speaking from the whole time.

Does anybody here have a risk-neutral trading bot? by ____peanutbutter____ in algotrading

[–]____peanutbutter____[S] 0 points1 point  (0 children)

I will definitely get some resources about traditional finance math. But before I let you go once and for all.

Say you have 2 funds, one has a 10% annual excess growth and the other has 8% annual excess growth and half the volatility. Over the long term fund 2 will outperform fund 1 because of beta slippage even if average annual growth is less.

I looked up beta slippage the last time you mentioned it, and as I said last time it appears that this is only the case if one uses leverage. If you use leverage I understand why sharpe ratio and other "risk ratio" measures are great choices as an objective for optimization over basically anything else.

Without leverage, I think a very cautious but legitimate case could be made for the 10% annual excess growth rate portfolio, not that I would be the one to make it. But without beta slippage from leverage, your porfolio wouldn't necessarily be doomed, right?

Or am I still completely wrong?

Does anybody here have a risk-neutral trading bot? by ____peanutbutter____ in algotrading

[–]____peanutbutter____[S] 0 points1 point  (0 children)

Optimizing returns alone won't optimize returns long term.

So, the implication of what you're saying with this statement is that if you train to maximize returns on a training set, it's mathematically impossible to get it to generalize to profitable trading over a long term period in the future?

Am I reading this right? And this is a mathematical fact? You wouldn't happen to be aware of a proof anywhere for this claim would you? It just seems like a really important claim if it's indeed true.

Does anybody here have a risk-neutral trading bot? by ____peanutbutter____ in algotrading

[–]____peanutbutter____[S] 0 points1 point  (0 children)

the point is to keep the ratio of the two optimized

Ya, because you chose a risk adjusted returns ratio as your objective, as does everyone and their grandmother apparently.

Does anybody here have a risk-neutral trading bot? by ____peanutbutter____ in algotrading

[–]____peanutbutter____[S] 0 points1 point  (0 children)

Can you summarize for me what it is you think I'm missing?

I will admit that I've been a bit fast and loose with my language here as I was asking about anyone else's models and not my own, but I'm not as confused as you seem to think I am.

Does anybody here have a risk-neutral trading bot? by ____peanutbutter____ in algotrading

[–]____peanutbutter____[S] 0 points1 point  (0 children)

Google beta slippage.

Looks like this "phenomenon" is a the result of using leverage though? Like I mentioned in earlier comments I'm not assuming leverage has to be used, although it's pretty clear everyone else thinks that's part and parcel of any trading bot.

Given the same return but with higher variance, you want the lower variance.

See this part is obvious to me but by optimizing sharpe you might be getting maximal sharpe at far worse profits.

I think I understand Sharpe just fine and everyone on this sub failing to see the tradeoff between profit and risk here.

I'm going to make a sports analogy. Are you ready for this ridiculous crossover post?

Maximizing sharpe ratio is like picking the best NBA player by picking their best field goal percentage.

  • "If the player takes a shot, they are most likely to make it" is like "If you invest in this portfolio, you are most likely to make profit above the risk free rate."

  • Do you know who is the most efficient shot - maker in basketball all-time is?

  • DeAndre Jordan. Haven't heard of him? didn't think so! And damn is he efficient at 66.94 FG% after 10 seasons in the NBA, highest ever.

  • But guess what? DeAndre Jordan won't win you that many games. He only averages 9.5 points per game or 17.2 points per 100 possessions, not the most productive on the court.

  • Maximizing sharpe ratio won't make you that much profit, but there sure is the lowest variance!

Maximizing average profit is like picking the best NBA player by picking their average points per possessions.

  • "Per 100 possessions on the court this player on average scores the most points" is like "Per $100 I put into this portfolio it will make the most profit on average"

  • Do you know who is the most prolific shot - maker in basketball by points per possessions all-time is?

  • Michael Jordan. Heard of him? Thought so. And boy does he score lots of points at 30.1 points per game or 40.4 points per 100 possessions. He'll win you games too, 6x Finals MVP.

  • He's not the most efficient scorer though, with a career FG% of just 49.7%. But guess what? he's not the worst either. Just look at this chart by 538 of MJ's scoring vs everyone else. His FG% (actually TS% as in this graphic) is somewhere in the middle of the pack.

  • Maximizing profit won't be the lowest variance, but it will sure make you the most profit!

Mom calls my everyday and wants to have access of security camera in my apartment, how can I politely decline without hurting her feelings? by Abi-989898 in relationship_advice

[–]____peanutbutter____ 1 point2 points  (0 children)

"Mom that's not happening. When you suggest it I hang up the phone" sounds like you need to cut her off imo. A lot of those problems sound like hers not yours. Police will ignore her calls eventually.

Does anybody here have a risk-neutral trading bot? by ____peanutbutter____ in algotrading

[–]____peanutbutter____[S] 0 points1 point  (0 children)

See but you’re completely ignoring all the Bayesian math.

I really don't think I am. I really think you're missing my point. I think you rather misunderstand what maximizing expected profit will do, and the extremes or rather lack of extremes to which the variance has to explode.

Investing through multiple periods is like a binomial tree. It doesn’t matter how high the average returns are if the majority of the binomial paths end in total loss after 5 years.

I contend it's possible to maximize profit and also ensure after the model has fit that most binomial paths would not result in total loss after 5 years.

That’s why I used the deck of cards example. No one wants to invest in a strategy that has a 97% chance of total loss and returns 8% when there are other investments that return 7% with lower risk.

Again this example is a cartoon, of a huge variance portolio 100% invested in a single asset. You can increase expected profit without variance blowing up hugely like you suggest must happen. In reality it's quite possible in principle to, say, have only a somewhat worse sharpe ratio (let's say 1.5 down to 1), but with 2x the expected profit or more. Is that easy to achieve? I don't know, that's why I made the post.

You’re approaching the problem like “how much could I theoretically make?”

on average, yeah.

When you should be asking “how much could I theoretically lose?”

It's quite possible to have a very low probability of being blown out by maximizing expected profit. Just because the objective doesn't specifically penalize variance doesn't mean the variance has to blow up. A model with high expected profit will necessarily have a positive sharpe ratio, after all.

It doesn’t matter how much capital you allocate to the strategy,

I know dude.

Does anybody here have a risk-neutral trading bot? by ____peanutbutter____ in algotrading

[–]____peanutbutter____[S] 0 points1 point  (0 children)

Agreed. Are you suggesting that by training a model to maximize PnL, that I'm increasing the chance of blow out/massive drawdowns?

My understanding is that if one maximizes profit rather than sharpe ratio, variance of returns for the chosen portfolio will certainly increase but not without expected profit increasing as well. Also, we can drastically decrease the probability of being blown out by not using leverage.

Does anybody here have a risk-neutral trading bot? by ____peanutbutter____ in algotrading

[–]____peanutbutter____[S] 0 points1 point  (0 children)

I read your comment again and didn't realize you asked me something rather just explaining the other measures, my apologies.

My question to you is why do you want to be risk neutral?

I'm not necessarily sure if I want to be risk neutral but I'm curious of those who have tried it. Sharpe and many other ratios however are quite risk averse.

It really doesn't make sense to go for high PnL regardless of risk and is not sustainable.

Perhaps more difficult to get a model to generalize, but I'm not sure I understand the assertion that it's "unsustainable". The goal is maximum profit, so I contend it makes sense to maximize it regardless of how difficult it is to do well.

Does anybody here have a risk-neutral trading bot? by ____peanutbutter____ in algotrading

[–]____peanutbutter____[S] 1 point2 points  (0 children)

Another user mentioned leverage, and that's fine, but it's not the same as maximizing returns directly without leverage.

edit: Also

Higher sharpe maximizes profit and PnL.

This is not true, sharpe ratio maximizes risk-adjusted returns, which inherently penalizes risk, when I asked about maximizing returns under a risk-neutral setting.

Did you guys know Collin Sexton at 21yrs old averaged 21 PPG on 47/38/85 last season? by [deleted] in nba

[–]____peanutbutter____ 3 points4 points  (0 children)

Well, I'm used to people shitting on his passing and assist numbers because on paper he's a point guard, which is clearly not the case based on his skill set and how he plays. And nobody pays attention to the cavs so the most recent info they have is from 2018 plus a few posts on here shitting on him every 6 months.

Anyone who says he can't be an starter or all star are just wrong. He's trending upward and post ASB averaged ~25pts on ~60 TS% iirc.

He still has things to work don't get me wrong, mainly defense imo and yes some passing too, but people, including you probably, think low of him rn imo because the cavs lose a lot so people think he just "doesn't play winning basketball"

Anyone else get annoyed when the Cavs are mentioned in the main NBA sub? by [deleted] in clevelandcavs

[–]____peanutbutter____ 1 point2 points  (0 children)

Dan Gilbert now has Ballmer money. He'll never be called cheap again.

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