How to implement Max Daily Drawdown in the Framework?

The only way I have found to do this now is to call Liquidate from the Alpha model, but a more elegant solution would be preferred.

Hey Kctrader,

The most elegant solution is to implement it in a RiskManagementModel. In general, it is good practice to keep the AlphaModel's calculations independent of the contents of the portfolio. It is also good practice to limit AlphaModel to emitting insights and not calling Liquidate within that class.

Hi Rahul,

I tried my best to do that.  The challenge is that the risk management model cannot expire the insights, so even if it sets the portfolio targets to 0 and exits the position, it will simply re-enter based on the unexpired insights.  This is also a problem with the current RiskManagementModels, not just the one I want to implement. 

We had a thread in Slack about it and there was some discussion about the best way to handle this going forward.  Jared suggested adding the ability to expire insights.  

Thanks, KC we've added a Github issue for expiring insights and will get there ASAP. 

If you can post a mock example of the risk model getting ignored it would help debug this. I think the model's outputs are meant to be "pulsing" not "steady-state", so if something is getting overridden/ignored we might need to really look into why. 

Also really consider if you need the framework; if you need to control each trade you might not want to use the framework scaffolding. 

Jared Broad Here is a backtest that shows the issue.  A UGAZ insight is generated at 9:31 and the framework enters the position. The risk model exits the position shortly past 10am.  At 12pm we generate an insight for DGAZ.  At that point the framework enters an equal position on both DGAZ and UGAZ because the UGAZ insight has not expired.

I think the crux of the issue is that sending in additional insights for any security causes ProcessInsights to execute and it continues to use all unexpired insights, regardless of what the Risk Management Model has done.

I'll post this to Github as well.

Jared, is there any progress on this? I noticed that the issue is still open and not assigned on Github. 

Is there a recommended workaround? -thanks.

Addition info FYI: 

There is another forum post that goes into this further:

Hey Greg,

What I came to realize is that I needed to implement my own PortfolioConstructionModel.  This gives you much more control over how the insights are handled. 

-Cole

If you didn't specify a time for an insight to last and instead, could you just re-issue the insights at whatever interval you are working with and if you need to liquidate then just issue "flat" insights for those stocks? The problem seems to be that the timeframe you add for insights to run causes them to constantly be re-issued even if you don't want them to be, because you want to liquidate then instead as in the case of a drawdown. 

So if you don't put a time on the insights then they won't re-issue, right? Then if you make them "flat" they sell, right?

Another question: If you signal "up" over and over for the same stock will the equal weight portfolio manager just basically ignore the new ups since they are already in the portfolio? It really can't buy more if the stock is already bought, right? (Except for the minor weighting adjustments.)

(This insight alpha system appears to me to be very simplistic and underdeveloped. Maybe that is why the alpha market is being shutdown and revamped. It worked great when the fed was flooding the market with trillions and almost any hair-brained overfitted alpha would work. Now things are getting much more complicated and overfitting is going to kill you.)

Hi Greg

• if you need to liquidate then just issue "flat" insights for those stocks?

Yes, with a period that overlaps the previous insight, normally the same period.

• So if you don't put time on the insights then they won't re-issue, right? Then if you make them "flat" they sell, right?

This depends on the Portfolio Construction Model. The built-in PCM in LEAN follow that rule.

• If you signal "up" over and over for the same stock will the equal weight portfolio manager just basically ignore the new ups since they are already in the portfolio?

This depends on the Portfolio Construction Model. On built-in PCM in LEAN, if there are multiple insights of the same security, they consider the latest, so there is no cumulative effect.

Best
Louis