OptimalF money management

For re-investing profits or assigning capital to portfolio components, Zorro can determine the optimal capital allocation factor - named OptimalF - for every component in a portfolio strategy. For this, it evaluates the component's balance curve for calculating the investment amount that generates the maximum end profit while avoiding a negative balance. For instance, if OptimalF is 0.05, then the suggested invested margin is 5% of the available capital. The margin can be smaller - for reasons mentioned in workshop 6, only the square root of gains should be reinvested - but it must not be higher. The OptimalF algorithm was developed by Ralph Vince and described in several publications (see books).

OptimalF factors can also be used for allocating the capital to the components of a multi-asset system under certain conditions. The total allocated margin must be at any time small compared to the total invested capital. This is normally the case for trading systems with independent assets on leveraged accounts, where the capital is mostly needed for buffering drawdowns. The suggested margin of a trade is then the available capital multiplied with OptimalF. There are several methods to determine the available capital of a portfolio component; a method on the conservative side is dividing the initial total capital by the square root of components and multiplying it with the square root of gains (see example). Systems that don't fulfil the requirements, for instance portfolio rebalancing systems that are always in the market with 100% capital, normally use other algorithms such as mean_variance or momentum-based weights for distributing the capital.

For using OptimalF, set the FACTORS flag. OptimalF factors are then calculated in a special test run at the end of the [Train] process, and stored in a file Data\*.fac. It's a simple text file that looks like this:

AUD/USD:ES          .036  1.14   45/87     0.1
AUD/USD:ES:L        .036  1.14   45/87     0.1 
AUD/USD:ES:S        .000  ----    0/0      0.0  
EUR/USD:VO          .027  2.20   24/23     3.3  
EUR/USD:VO:L        .027  1.58   12/11     0.9 
EUR/USD:VO:S        .032  2.90   12/12     2.5 
NAS100:ES           .114  1.42   63/90     4.6 
NAS100:ES:L         .101  1.39   33/44     2.1  
NAS100:ES:S         .128  1.46   30/46     2.5  
USD/CAD:BB          .030  1.41   19/25     1.3 
USD/CAD:BB:L        .030  1.41   19/25     1.3  
USD/CAD:BB:S        .000  ----    0/0      0.0  
USD/CAD:HU          .012  1.74   48/36     3.3  
USD/CAD:HU:L        .066  1.42   24/20     0.2 
USD/CAD:HU:S        .012  1.79   24/16     3.1  
USD/CHF:CT          .104  1.60   16/17     0.6  
USD/CHF:CT:L        .104  1.60   16/17     0.6  
USD/CHF:CT:S        .000  ----    0/0      0.0  
USD/CHF:CY          .025  1.10   21/24     0.1  
USD/CHF:CY:L        .025  1.10   21/24     0.1  
USD/CHF:CY:S        .000  ----    0/0      0.0 
USD/CHF:HP          .025  1.45   31/48     3.2 
USD/CHF:HP:L        .000  ----    0/0      0.0 
USD/CHF:HP:S        .025  1.45   31/48     3.2  
USD/CHF:VO          .011  3.93   17/8      7.6 
USD/CHF:VO:L        .011  3.93   17/8      7.6 
USD/CHF:VO:S        .000  ----    0/0      0.0 

The first column identifies the component; it consists of the asset name and the algorithm identifier. "S" or "L" are separate statistics for short or long trades. The second column contains the OptimalF factors for that component. The higher the factor, the more capital should be invested in the strategy component. Since calculated separately for any component, the factors do not sum up to 1. A 0 indicates that this component should not be traded. The further columns contain the profit factor, the number of winning and losing trades, and the weight of the component.

As the factors are stored in a simple text file, they can be edited anytime with a text editor, even while live trading. Zorro detects if factors have been changed, and automatically reloads them. If the factors are evaluated in the strategy, as in some of the Z strategies, a component can be excluded from further trading by setting its factor to zero, or by placing a minus sign in front of it for making it negative.


Assigning capital does not happen automatically, but must be done in the script. For this the following variables can be used:




OptimalF factors, combined for long/short and separately for long and short trades of the current strategy component that is selected with the asset and algo functions. For long-only systems, only OptimalFLong is relevant. The margin to be invested per trade can be calculated by multiplying the investment amount with OptimalF. In [Train] mode or when the FACTORS flag is not set, the OptimalF factors are always 1. If a component was unprofitable in the training run, its OptimalF factor is zero.


Generate OptimalF factors with the given ratio of the highest to the lowest factor (default = 0 = no ratio). For instance, at OptimalFRatio = 3 large factors are reduced and small factors are increased so that the highest OptimalF factor is 3 times the lowest factor. The average of all factors remains unchanged. Useful for preventing large component margin differences when using OptimalF factors in portfolio systems.


Examples of different investment methods (see also workshop 6):

// multi-asset system: reinvest the square root of profits separately per component and long / short trades
var AvailableCapital = Capital/sqrt(NumComponents);
Margin = ifelse(ForLongTrade,OptimalFLong,OptimalFShort)*AvailableCapital*sqrt(1+(WinLong-LossLong)/AvailableCapital);
// single-asset system: reinvest the square root of your total profits
Margin = OptimalF * Capital * sqrt(1 + (WinTotal-LossTotal)/Capital);

See also:

Margin, RISKLIMIT, Win/Loss, Markowitz, Performance, Tutorial


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