PROs and CONs of Commercial Expert Advisors Trading Strategy Analysis Trading Strategy Analysis

Trading Strategy Risk Management to Attract Investment Capital

Experienced traders know how important Risk management is. In fact, you’ll understand that it is likely the single most crucial aspect of trading. For this reason, most of Darwinexs’ Investible Attributes focus on some element of risk. 

Darwinexs’ Investible Attributes attempt to identify weak points in a trading strategy and give Investors and Traders alike metrics to allow them to make informed decisions. It is impossible to make sensible investment decisions without having a depth of informative material available. 

The importance of risk in trading and investment is also why Darwinex created the DARWIN Risk Engine. The Risk Engine actively monitors the underlying strategy and adjusts the risk on the corresponding DARWIN where necessary. 

In doing this, Darwinex is able to Target a Max monthly VAR (95%) of 6.5%. This process is vital for investors. It reassures them that the DARWIN they’re investing in has appropriate measures to control risk outside of the Traders own risk management processes. 

With this in mind, the Risk Engines seeks to analyse the trading account and monitor the deviation of an expected outcome. If it feels the trader is acting outside of what is expected, which increases the risk in a manner it feels is unacceptable, it will adjust the risk on the DARWIN accordingly. 

This action allows all DARWINs to be standardised meaning you can accurately compare them to one another. This comparison would not be possible ordinarily when comparing two very different strategies, hence why the Investible Attributes are so valuable. 

Risk Management using The Risk Adjustment (Ra) IA 

The (Ra) Investible Attribute measures the level of involvement the risk engine must take to achieve its target of a max 6.5% Var (95%). An underlying strategy with an unstable and unpredictable risk profile will require more intervention by the risk engine, thus providing the DARWIN with a low (Ra) score. 

Another important note regarding the risk engine is that it will intervene if the D-Leverage exceeds a set limit. This limit is ultimately for the protection of the investors capital. For those not familiar with D-Leverage, you can find out more here. A future post will cover D-Leverage in greater detail.  

A DARWIN is a financial Derivative. 

Darwinex has implemented numerous risk mitigation processes to protect investors money. But a DARWIN is still a financial derivative, and as such, you should take care when investing in derivatives. 

A derivative is a financial contract ‘derived’ from an underlying asset so that the price movements of the derivative and the underlying asset are highly correlated over time. 

The important detail to note here is that the above risk management processes DO NOT mitigate the risk of the underlying trading account, and as such, your capital is at risk. Remember to take care when choosing to invest in ANY derivative product, including DARWINs. 

If you have any questions or queries regarding investing in DARWINs, please do not hesitate to contact us. 

Darwinex provides an unmatched level of insight to its Traders and Investors.

For Traders

Having this level of analysis available without having to conduct rigorous tests is invaluable. It can save time and allow the trader to focus on the most pressing issues affecting their trading account. 

It also provides insight into metrics investors may use to base investing decisions on. This insight can allow the trader to adjust some aspects of their strategy to increase risk management and stability factors to make a DARWIN safer and thus more appealing to attract third-party capital. 

For Investors

Having an extra layer of risk mitigation can reassure investors that every step possible to protect their investments is taken. They will still have exposure to various market risks, but these are controlled as is reasonably practical. 

Another perk for investors is that Darwinex has third-party deposit protection on top of the FSCSs’ protection. This extra insurance means that your deposits are protected up to £1 million.  

Brought to you by Darwinex: UK FCA Regulated Broker, Asset Manager & Trader Exchange where Traders can legally attract Investor Capital and charge Performance Fees.

Risk disclosure:

Content Disclaimer: The contents of this video (and all other videos by the presenter) are for educational purposes only. They are not to be construed as financial and/or investment advice.

Loss Aversion

Analysis Paralysis can be a real problem | Darwinex has a solution

Analysis Paralysis doesn’t have to be a problem. Looking at too much information can leave you unable to make a decision, overthinking every situation. In trading, you need to feel confident that what you are working on will directly lead you to achieving your goal. 

As with everything in life, there are no guarantees, except death and taxes, of course, but you need to feel comfortable that you have done everything reasonable in your power. Analysis Paralysis detracts from this, leading you to second guess your decisions and use up time wastefully. 

What can you do as a Trader to avoid Analysis Paralysis?

This question is tricky to answer, given that the life of an Algorithmic Trader is to analyse vast amounts of data. The key is to focus on the most important factors. A famous saying that sums this up well is “Don’t Major in Minor Things”. 

Focus on the essential variables first. Then spend less time on the less important ones. This can help prevent Analysis Paralysis. Let’s say you want to look into a strategy that trades UK fixed income or UK equities.

Given that Pension funds and Insurance companies make up over 80% of the traded volume of these assets, it makes more sense to focus on researching the driving forces behind these Institutional Entities than, say, that of hedge funds.

Due to the size of the Pension funds and Insurance companies, it is logical to assume these will impact the market more than hedge funds.

This concept can be increasingly challenging if you want to manage third party funds in some manner. Successful Traders need to be adept at a variety of skills; Market Analysis and statistics, for instance.

But people who manage third party funds have a raft of other considerations to take into account. The first and most important of which would be the qualification you need to comply with your countries regulations.  

Do high-level metrics help with Analysis Paralysis?

Yes. But there is always a trade-off. It would be best if you decided what level of analysis you require for any particular application. You’ll need to determine whether the level of time and effort is warranted.

You may have one or two high-level metrics that filter the order in which you research things further. You could even have a second layer of metrics that filter additionally.

So by the time you’ve filtered most of the valuable strategies, you’ve spent very little time and can focus on those that have the highest potential.

What would this look like?

Let’s say you have developed ten different Trading Strategies. You’ve put together some basic code and have some returns profiles to analyse.

Firstly you could rank them by D-Score. Then start exploring the strategy with the highest D-Score. You can then look at that strategies Investible Attribute scores and rank accordingly. 

Doing this provides you with an order of priority for each of your ten strategies. You also have some mid-level metrics that can indicate which look the most viable.

This filtering process allows you to focus your time on the strategies that have the best chance of success.

Strategies with low scores can go into the ‘another day pile’ that you can investigate when you have more free time. 

This kind of process is vital because trading isn’t a perform once and go to the beach endeavour. Strategies will decay; some will work in specific economic environments but not others. You need to remain adaptable. 

So what’s a D-score, and what is an Investible Attribute?

D-Score is a high-level propriety metric aiming to rank and compare strategies based on several underlying data points. It provides a high-level look at the likelihood of the DARWIN performing in future. 

It’s important to note that past performance isn’t an indication of future performance. However, it can be an indicator of the ability of the Trader. This again doesn’t guarantee success, and you should always do your research. 

The D-Score is a powerful high level metric to use to filter which strategies to focus more of your time on. 

Investible Attributes, on the other hand, give more details into specific areas of a strategy. For instance, the Experience Investible attribute measures the statistical significance of a trading strategy. 

Hold on, what’s a DARWIN?

If you aren’t yet familiar with DARWIN assets, think of them like ETFs or Mid-Cap Stocks. 

Just like an ETF could track the performance of the S&P500, a DARWIN is a financial asset that tracks the performance of a trader’s underlying trading strategy in real-time.

Darwinex manages the risk of investments in DARWIN assets independently of providers, ensuring that they carry a monthly maximum target VaR (95%) of 6.5%.

As these are Proprietary tools, do I need to be a customer of Darwinex? 

To create a DARWIN and attract third-party capital, you need to create a live funded trading account.

However, to use the proprietary tools Darwinex created, all you need to do is create a free basic account and link your existing trading account from your current broker. There is no need to deposit any funds. Just enter a couple of details, and you’re good to go.

You can find more instructions on how to do this here

It only takes a few seconds and gives you access to all the benefits of analysing a strategy using the Investible Attributes. 

If you don’t already filter the trading processes you go through, why not give the above a try and let us know what you think. You can reach us @Darwinexchange

Brought to you by Darwinex: UK FCA Regulated Broker, Asset Manager & Trader Exchange where Traders can legally attract Investor Capital and charge Performance Fees.

Risk disclosure:

Content Disclaimer: The contents of this video (and all other videos by the presenter) are for educational purposes only, and are not to be construed as financial and/or investment advice.