My basic approach with bubbles is balancing. Think in terms of risk exposures rather than entries and exits.
Consider how far the price might drop when the bubble finally pops (sometimes that’s to zero) and consider how many dollars you’re willing to lose on the bet. So, in the case of something that could drop to zero, that means never leaving any more than your maximum loss in dollars in the investment. As the bubble inflates, sell off shares to stay below that value. That means you’re locking in gains. When it does finally pop, most of what’s left at risk in there might evaporate, but you’ve kept your profits on the way up. If you think the floor is some value higher than zero, then you risk a fixed amount above the floor.
If it dips significantly, it might be about to pop, or it might just be a swing on its way up. Try to keep your risk constant by putting more dollars in. This can be hard. Be systematic rather than emotional. E.g. maybe pre-commit to putting more dollars in once your investment’s value drops below 90% of your max risk. But don’t trade too often or you’ll burn too much in transaction costs. The exact details of your system are less important than actually using a system.
You might run into granularity issues if the price of a single share is above your risk target. At that point, you’re done. Sell your last share and get out.
This is pretty much the strategy you’d get by Kelly betting (or fractional Kelly betting) on a strategy that’s a small part of your portfolio. For multiple simultaneous strategies that are a significant fraction of your portfolio, Kelly will also make you balance strategies against each other instead of just against cash.
Can we do any better than this?
Unless you’ve analyzed a real anomaly that lets you predict the crash better than the market, then the answer is probably “No.” Although, if there are derivatives like options or futures or correlated assets, then maybe you have more (heh) options on how to trade this.
But there’s so much noise in the markets that it takes a lot of data to try and predict things better than the current price. A SPAC that only lasts two years is not going to have enough price history. But sometimes price anomalies cut across entire sectors. If you can aggregate returns data from multiple SPACs, then maybe you can try to analyze factors that apply to all of them (or most of them). The basic process is like I described in Charting Is Mostly Supersition. Sometimes you can find an anomaly that lets you predict things a little better than chance. Even small edges can be very valuable.
My basic approach with bubbles is balancing. Think in terms of risk exposures rather than entries and exits.
Consider how far the price might drop when the bubble finally pops (sometimes that’s to zero) and consider how many dollars you’re willing to lose on the bet. So, in the case of something that could drop to zero, that means never leaving any more than your maximum loss in dollars in the investment. As the bubble inflates, sell off shares to stay below that value. That means you’re locking in gains. When it does finally pop, most of what’s left at risk in there might evaporate, but you’ve kept your profits on the way up. If you think the floor is some value higher than zero, then you risk a fixed amount above the floor.
If it dips significantly, it might be about to pop, or it might just be a swing on its way up. Try to keep your risk constant by putting more dollars in. This can be hard. Be systematic rather than emotional. E.g. maybe pre-commit to putting more dollars in once your investment’s value drops below 90% of your max risk. But don’t trade too often or you’ll burn too much in transaction costs. The exact details of your system are less important than actually using a system.
You might run into granularity issues if the price of a single share is above your risk target. At that point, you’re done. Sell your last share and get out.
This is pretty much the strategy you’d get by Kelly betting (or fractional Kelly betting) on a strategy that’s a small part of your portfolio. For multiple simultaneous strategies that are a significant fraction of your portfolio, Kelly will also make you balance strategies against each other instead of just against cash.
Can we do any better than this?
Unless you’ve analyzed a real anomaly that lets you predict the crash better than the market, then the answer is probably “No.” Although, if there are derivatives like options or futures or correlated assets, then maybe you have more (heh) options on how to trade this.
But there’s so much noise in the markets that it takes a lot of data to try and predict things better than the current price. A SPAC that only lasts two years is not going to have enough price history. But sometimes price anomalies cut across entire sectors. If you can aggregate returns data from multiple SPACs, then maybe you can try to analyze factors that apply to all of them (or most of them). The basic process is like I described in Charting Is Mostly Supersition. Sometimes you can find an anomaly that lets you predict things a little better than chance. Even small edges can be very valuable.