If you were to use a leveraged asset with your mean reversion system how would you control money management and risk without a stop loss while increasing weights algorithmically?
Hello Jane,
If you don't want to use stop-loss and looking for other ways to control your risk, there are many ways to do it. You can hedge your positions with (inversely) correlated assets, or you can also hedge using options contracts.
However, this approach is well suited for investing than for trading. For example, if you have created a portfolio and want to control risk or control money management, you can allocate capital as per the constituent's standard deviation (or other measures of risk). Similarly, you can also design another portfolio that statistically hedges your main portfolio as per capital allocated. In the case of trading, it is a better choice to use volatility-based stop-loss or any absolute stop-loss to control the risks effectively.
Hope this helps!