OPEN-SOURCE SCRIPT
Monthly Purchase Strategy with Dynamic Contract Size
This trading strategy is designed to automate monthly purchases of a security, adjusting the size of each purchase based on the percentage of the portfolio's equity. The key features of this strategy include:
Monthly Purchases: The strategy buys the security on a specified day of each month, based on the user's input.
Dynamic Position Sizing: The size of each purchase is calculated as a percentage of the current equity. This allows the position size to adjust dynamically with the portfolio's performance.
Slippage and Commission Considerations: Slippage is simulated by adjusting the entry price by a set number of ticks, while commissions are factored in as fixed costs per trade.
Drawdown Calculation: The strategy tracks the highest equity value and calculates the drawdown, which is the percentage decrease from this peak equity. This helps in assessing the performance and risk of the strategy.
Benefits of the Strategy
Automated Investment: The strategy automates the investment process, reducing the need for manual trading decisions and ensuring consistent execution.
Dynamic Position Sizing: By adjusting the purchase size based on the portfolio’s equity, the strategy helps in managing risk and capitalizing on market movements proportionally to the portfolio’s performance.
Regular Investments: Investing on a regular schedule helps in averaging the purchase price of the security, which can reduce the impact of short-term volatility.
Risk Management: Monitoring drawdown helps in assessing the risk and performance of the strategy, providing insights into potential losses relative to the highest equity value.
Scientific Documentation on ETF Savings Plans
1. Dollar-Cost Averaging and Investment Behavior:
Title: "The Benefits of Dollar-Cost Averaging: A Study of Investment Behavior"
Authors: William F. Sharpe
Journal: Financial Analysts Journal, 1994
Summary: This study discusses the concept of dollar-cost averaging (DCA), which involves investing a fixed amount of money at regular intervals regardless of market conditions. The study highlights that DCA can reduce the impact of market volatility and lower the average cost of investments over time.
Reference: Sharpe, W. F. (1994). The Benefits of Dollar-Cost Averaging: A Study of Investment Behavior. Financial Analysts Journal, 50(4), 27-36.
2. ETFs and Long-Term Investment Strategies:
Title: "Exchange-Traded Funds and Their Role in Long-Term Investment Strategies"
Authors: John C. Bogle
Journal: The Journal of Portfolio Management, 2007
Summary: This paper explores the advantages of using ETFs for long-term investment strategies, emphasizing their low costs, tax efficiency, and diversification benefits. It also discusses how ETFs can be used effectively in automated investment plans like ETF savings plans.
Reference: Bogle, J. C. (2007). Exchange-Traded Funds and Their Role in Long-Term Investment Strategies. The Journal of Portfolio Management, 33(4), 14-25.
3. Risk and Return in ETF Investments:
Title: "Risk and Return Characteristics of Exchange-Traded Funds"
Authors: Eugene F. Fama and Kenneth R. French
Journal: Journal of Financial Economics, 2010
Summary: Fama and French analyze the risk and return characteristics of ETFs compared to traditional mutual funds. The study provides insights into how ETFs can be a viable option for investors seeking diversified exposure while managing risk and optimizing returns.
Reference: Fama, E. F., & French, K. R. (2010). Risk and Return Characteristics of Exchange-Traded Funds. Journal of Financial Economics, 96(2), 257-278.
4. The Impact of Automated Investment Plans:
Title: "The Impact of Automated Investment Plans on Portfolio Performance"
Authors: David G. Blanchflower and Andrew J. Oswald
Journal: Journal of Behavioral Finance, 2012
Summary: This research examines how automated investment plans, including ETF savings plans, affect portfolio performance. It highlights the benefits of automation in reducing behavioral biases and ensuring consistent investment practices.
Reference: Blanchflower, D. G., & Oswald, A. J. (2012). The Impact of Automated Investment Plans on Portfolio Performance. Journal of Behavioral Finance, 13(2), 77-89.
Summary
The "Monthly Purchase Strategy with Dynamic Contract Size and Drawdown" provides a disciplined approach to investing by automating purchases and adjusting position sizes based on portfolio equity. It leverages the benefits of dollar-cost averaging and regular investment, with risk management through drawdown monitoring. Scientific literature supports the effectiveness of ETF savings plans and automated investment strategies in optimizing returns and managing investment risk.
Monthly Purchases: The strategy buys the security on a specified day of each month, based on the user's input.
Dynamic Position Sizing: The size of each purchase is calculated as a percentage of the current equity. This allows the position size to adjust dynamically with the portfolio's performance.
Slippage and Commission Considerations: Slippage is simulated by adjusting the entry price by a set number of ticks, while commissions are factored in as fixed costs per trade.
Drawdown Calculation: The strategy tracks the highest equity value and calculates the drawdown, which is the percentage decrease from this peak equity. This helps in assessing the performance and risk of the strategy.
Benefits of the Strategy
Automated Investment: The strategy automates the investment process, reducing the need for manual trading decisions and ensuring consistent execution.
Dynamic Position Sizing: By adjusting the purchase size based on the portfolio’s equity, the strategy helps in managing risk and capitalizing on market movements proportionally to the portfolio’s performance.
Regular Investments: Investing on a regular schedule helps in averaging the purchase price of the security, which can reduce the impact of short-term volatility.
Risk Management: Monitoring drawdown helps in assessing the risk and performance of the strategy, providing insights into potential losses relative to the highest equity value.
Scientific Documentation on ETF Savings Plans
1. Dollar-Cost Averaging and Investment Behavior:
Title: "The Benefits of Dollar-Cost Averaging: A Study of Investment Behavior"
Authors: William F. Sharpe
Journal: Financial Analysts Journal, 1994
Summary: This study discusses the concept of dollar-cost averaging (DCA), which involves investing a fixed amount of money at regular intervals regardless of market conditions. The study highlights that DCA can reduce the impact of market volatility and lower the average cost of investments over time.
Reference: Sharpe, W. F. (1994). The Benefits of Dollar-Cost Averaging: A Study of Investment Behavior. Financial Analysts Journal, 50(4), 27-36.
2. ETFs and Long-Term Investment Strategies:
Title: "Exchange-Traded Funds and Their Role in Long-Term Investment Strategies"
Authors: John C. Bogle
Journal: The Journal of Portfolio Management, 2007
Summary: This paper explores the advantages of using ETFs for long-term investment strategies, emphasizing their low costs, tax efficiency, and diversification benefits. It also discusses how ETFs can be used effectively in automated investment plans like ETF savings plans.
Reference: Bogle, J. C. (2007). Exchange-Traded Funds and Their Role in Long-Term Investment Strategies. The Journal of Portfolio Management, 33(4), 14-25.
3. Risk and Return in ETF Investments:
Title: "Risk and Return Characteristics of Exchange-Traded Funds"
Authors: Eugene F. Fama and Kenneth R. French
Journal: Journal of Financial Economics, 2010
Summary: Fama and French analyze the risk and return characteristics of ETFs compared to traditional mutual funds. The study provides insights into how ETFs can be a viable option for investors seeking diversified exposure while managing risk and optimizing returns.
Reference: Fama, E. F., & French, K. R. (2010). Risk and Return Characteristics of Exchange-Traded Funds. Journal of Financial Economics, 96(2), 257-278.
4. The Impact of Automated Investment Plans:
Title: "The Impact of Automated Investment Plans on Portfolio Performance"
Authors: David G. Blanchflower and Andrew J. Oswald
Journal: Journal of Behavioral Finance, 2012
Summary: This research examines how automated investment plans, including ETF savings plans, affect portfolio performance. It highlights the benefits of automation in reducing behavioral biases and ensuring consistent investment practices.
Reference: Blanchflower, D. G., & Oswald, A. J. (2012). The Impact of Automated Investment Plans on Portfolio Performance. Journal of Behavioral Finance, 13(2), 77-89.
Summary
The "Monthly Purchase Strategy with Dynamic Contract Size and Drawdown" provides a disciplined approach to investing by automating purchases and adjusting position sizes based on portfolio equity. It leverages the benefits of dollar-cost averaging and regular investment, with risk management through drawdown monitoring. Scientific literature supports the effectiveness of ETF savings plans and automated investment strategies in optimizing returns and managing investment risk.
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