Advances in Financial Machine Learning by Marcos M. López de Prado

Author:Marcos M. López de Prado [Marcos M. López de Prado]
Language: eng
Format: epub
ISBN: 9781119482109
Publisher: Wiley
Published: 2018-02-01T16:00:00+00:00

13.3 The Problem

Suppose an investment strategy S invests in i = 1, … I opportunities or bets. At each opportunity i , S takes a position of m i units of security X , where m i ∈ ( − ∞, ∞). The transaction that entered such opportunity was priced at a value m i P i , 0 , where P i , 0 is the average price per unit at which the m i securities were transacted. As other market participants transact security X , we can mark-to-market (MtM) the value of that opportunity i after t observed transactions as m i P i , t . This represents the value of opportunity i if it were liquidated at the price observed in the market after t transactions. Accordingly, we can compute the MtM profit/loss of opportunity i after t transactions as π i , t = m i ( P i , t − P i , 0 ).

A standard trading rule provides the logic for exiting opportunity i at t = T i . This occurs as soon as one of two conditions is verified:

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