Scenario analysis is the process of gauging the expected value of a security or portfolio over a specific period, with variations in key factors that may affect the price of the security.
For instance, in trading, scenario analysis could mean evaluating the impact of changing market conditions on your open positions. These scenarios could be a downward or upward trending market or even extremes like a complete market crash.
How does scenario-based approach to trading help?
Algorithmic trading allows scenario analysis using mathematical models. These assessments are helpful in understanding the risk level within a security with respect to various events that could range from least probable to highly probable.
Based on the results of the analysis, a trader can decide whether the risk levels lie within his/her comfort zone and whether the trading strategy will benefit them.
Basic and worst-case scenarios to account for when trading
When trading, you would obviously want to take into consideration various market scenarios like volatility, choppy trading, bullish trend, bearish trend, and so on. You may also want to have conditions like a complete market crash as a least probable scenario, but one that cannot be ignored.
Further, there are many possibilities such as power failures, hardware failures, Internet connection issues, broker downtime, and overnight positions that could go wrong, and huge opening gaps, which could wreak havoc in your trades.
To be fair, anything could happen. But, the question is how do we avoid this from affecting our trades?
This is where scenario grading comes in.
How scenario grading helps
Scenario grading scores your trading strategy in various market conditions. Essentially, your strategy receives a grade based on how it will perform in specific market scenarios such as a market crash, sideways.
The entire process involves grading any set of mechanical trading rules in a variety of market conditions.
This can help you fine-tune your strategy before you trade in the live market and avert huge losses. It also helps limit biased trading performance, as you may realize that your trading strategy works only in certain market conditions. It can also be handy to decide when to use a particular strategy.
PHI 1 offers scenario grading, unique only to the all-in-one platform
PHI 1’s scenario grading feature is a unique mechanism that measures the performance of any arbitrary trading strategy for multiple market scenarios.
Currently, the strategy grader checks for 7 different market scenarios – Uptrend High Volatility (Bull Market), Uptrend Low Volatility (Bull Market), Downtrend High Volatility (Bear Market), Downtrend Low Volatility (Bear Market), Sideways High Volatility, Sideways Low Volatility, and even Market Crash.
You can grade your strategy in six easy steps. And guess what! You can do it right away for free.
PHI 1 takes care of the entire spectrum of trading right from screening, charting, strategy creation, risk controls., backtesting, simulation, and order execution. All on one platform.
You ask what is really fully automated. We say PHI 1!