Before we dive into this detailed tutorial on strategy creation and monitoring on sharpely, it is important to understand how we define a strategy.
At a very broad level, a strategy is your approach to handling your trading and investments. But this is a very broad definition. For a platform like ours that allows users to build and trade strategies, we need a stricter definition.
Therefore, on sharpely, a strategy needs to have the following components:
This is the model that will be used to decide which instruments to invest/trade-in. An instrument selection model can be as simple as user selected basket of stocks or as complex as stocks derived from a stock screen or a factor model.
A more common term used for instrument selection in the quant industry is “signal”.
Throughout this tutorial, we will be covering various types of models in detail.
Once we have our instrument selection model in place, we need to decide how much money are we going to use for this strategy (starting capital) and how much to allocate to each instrument (read stocks/ETFs) selected by our instrument selection model.
We have several position sizing options which we cover in detail in the article – Position Sizing.
So now we know the list of stocks (or ETFs) and we know how much to allocate to each stock (or ETF) and we go ahead and take our strategy live (or paper trade).
But over time, not only will the weights of stocks change from the intended allocation, but even the underlying stocks can change if our instrument selection model is dynamic.
So, we need to decide the frequency at which we will align our strategy back to the intended instruments and weights. We discuss this in more detail in the article - Rebalancing schedule.
Any strategy must have sound risk management to avoid unforeseen scenarios. Risk management could include setting stop loss and profit booking triggers. It could also include exiting a stock if it enters surveillance (ASM/GSM/ESM).
Now we have also introduced an exit model. Using this, you can create exit rules that are different from entry rules. This feature is designed to help you create 'technofunda' strategies. You can learn more about it here.
We support multiple risk management models, details of which are in the article - Risk Management.
While this is an optional parameter, one should set a benchmark against which you measure the performance of your strategy.
For example, if your strategy is not even outperforming Nifty 50 TRI, you might as well just invest in an ETF or Index fund tracking Nifty 50 TRI.
Finally, here is a visual representation of the 4 major building blocks of a strategy:
In the next article (Types of strategies), we will discuss the types of strategies that are supported by sharpely.