Book Image

Algorithmic Short Selling with Python

By : Laurent Bernut
Book Image

Algorithmic Short Selling with Python

By: Laurent Bernut

Overview of this book

If you are in the long/short business, learning how to sell short is not a choice. Short selling is the key to raising assets under management. This book will help you demystify and hone the short selling craft, providing Python source code to construct a robust long/short portfolio. It discusses fundamental and advanced trading concepts from the perspective of a veteran short seller. This book will take you on a journey from an idea (“buy bullish stocks, sell bearish ones”) to becoming part of the elite club of long/short hedge fund algorithmic traders. You’ll explore key concepts such as trading psychology, trading edge, regime definition, signal processing, position sizing, risk management, and asset allocation, one obstacle at a time. Along the way, you’ll will discover simple methods to consistently generate investment ideas, and consider variables that impact returns, volatility, and overall attractiveness of returns. By the end of this book, you’ll not only become familiar with some of the most sophisticated concepts in capital markets, but also have Python source code to construct a long/short product that investors are bound to find attractive.
Table of Contents (17 chapters)
14
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15
Index

The science of the stop loss

"Profits look big only to the extent losses are kept small."

– Michael Martin

Most market participants have some vague idea that losses hurt the bottom line. They have just never really visualized the damage. Losses work geometrically against you. A 50% drawdown means you will have to make 100% profit just to get back to break even. As an example: someone buys a stock at 100. You take the other side of the trade and escort it down to 50. The tourist holds on all this time because the long-term story is still intact. That obstinate amateur will have to clock 100% to make it back to break-even.

The innocuous graph below shows something powerful enough to convince any rational market participant that keeping losses small is the only way to go. The lower line represents drawdowns from peak to -90%. The upper line represents the percentage growth needed to recoup those drawdowns. At -10% drawdown, the account must...