When it rebalances the take profit (tp) and stop-loss (sl) adjusts. Im wondering in principle / fundamnetals is this ok or should I use the INITIAL take-profit (tp) and stop loss (sl) at the time of order entry vs a system that adjusts take profits and stop loss even while an order is open.
Hello Jane,
In general, when you are rebalancing a mean reversion portfolio and if the asset with an open position has got a new entry, the stop loss of a new signal would depend on recent data and recent mean reversion characteristics of the asset.
Ideally you should close the old position and open a new position while rebalancing. However, this can be replicated by just changing the stop-loss and take-profit of existing open position to the new values.
However, if you are also changing the capital allocated per asset after every rebalancing cycle, then this approaching of changing exit parameters wouldn't work.
The take profit or 0 std dev line in the mean reversion system is a point in the asset's price chart and that changes in time (i belive so) . Im wondering if the hard stop loss should changing also.
Hi Jane,
Hard stop loss has to be set based on certain risk management techniques and it does not change.
You can set a dynamic stop loss which would change as and when the data gets updated (in this case the std dev line).
Thanks,
Rushda Ansari