How to rebalance short/long positions?

Discussion in 'Trading' started by qll, Nov 9, 2007.

  1. qll


    here is an example. you have $100k, $50k to short, and $50k to long. both positions now have 10% profit now. Now you have $45k short and $55k long with $10k reinvestable profit. What do you do? Your short/long ration is changed from 10/10 to 9/11. Should you add 5k to short then sell 5k long positions, to make 1/1 ration again? or add $10k to short, and does not change long? or add 5k to short and add 5k to long?

    Old position:
    $50k short, $50k long, $0 useable margin
    Current positoon:
    $45k short, $55k long, $10k useable margin.

    What to do?
  2. ronblack


    Good question. I would add to the position that generated the profit until some indicators reverse direction.

  3. qll


    using your method, if you keep adding by the same % to profitable positions, the short positions will get smaller and smaller and the long positions will get bigger and bigger.
  4. Rebalance, the portfolio back to the 1/1 ratio.
  5. qll


    that means, i will only add to the short positions.


    it is unhealthy.

    i think add by the same % is the best choice.
    or just think to have two initial 50k accounts. one for short and one for long.

    than 60long/50short will be better balanced.
  6. Very good question! This is the key to a profitable outcome in trading:

    (1) So what do you do if the net P/L is negative

    both the long and short are down by

    (a)same amount?

    (b) different much in % of shares/no. of contracts do you scale in on winning side, how much on losing side?

    (2) if net P/L is positive,

    when/at how much %gain do you scale in

    (a) equal amounts on both sides, as suggested by you or
    more on the losing side and less on the winning side-
    is there a better way to scale in?

    (b) how do you apply this concept to hedging spreads with spreads:
  7. qll


    here is my final conclusion:

    just think as you short 50k of the same stock and long 50k of the same stock, then you have a zero total. and no matter how it moves, you have a zero system risk. So here is answer to my question.

    You will increase and decrease by the same amount % of INITIAL investment.


    50/50 -> 55/45 -> 60/50 is the FINAL answer.