Semi-automatic Trader

IN THIS FINAL PART OF THE BOOK I’LL SHOW YOU HOW TO PUT THE framework into action for three specific examples. This first chapter is for semiautomatic traders, who make their own discretionary forecasts about price movements, but then use my systematic framework to manage their capital and position risk.

Using the framework

Instrument choice: size and costs As semi-automatic traders you don’t trade a fixed set of instruments. At any given time you will have a small number of positions, or ‘bets’, open. Those positions are drawn from a larger pool of instruments that you’ve formed opinions on.

Volatility targeting

I’ve already set the initial trading capital of this example at £100,000. But how aggressive should you be with this money – what should your percentage volatility target be? You need to refer back to chapter nine, ‘Volatility Targeting’. In this example I am going to assume that your Sharpe ratio (SR) will be at least 0.30 after costs, which I calculate below as 0.08 SR units.

Trading diary

Here is some paper trading I did using the semi-automatic trading system. All the calculations here have been done with a spreadsheet, which is available from my website. Prices and other values are rounded to make the example clearer

Although this looks like taking profits it is not; the system is trading automatically to keep the amount of capital at risk constant. If I hadn’t adjusted the stop then the expected holding period of my bet would have shortened. Because I’ve adjusted the stop I also need to cut the position, or I’ll have increased the risk on the trade.


This feels like a good place to stop this diary as I’ve shown most of the system’s most interesting features. Notice how the system went against my natural instincts when I wanted to close trades too early, or let losses run. Hopefully this should show you the benefits of rigorously sticking to a position management framework once you’ve designed it.

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