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Threshold Trading

In this article, you’ll learn about the threshold trading setting and how it’s used in Composer. Threshold trading is also referred to as corridor trading, or percentage-of-portfolio trading.

What is threshold trading?

Threshold trading is a type of trading frequency. Up to this point, Composer has only offered calendar-based trading, in which you set a time frequency you’d like your portfolio to trade. We now have two types of settings to trigger symphony trading: calendar trading and threshold trading.

Threshold trading takes a different approach–instead of trading on time frequencies, you can set a range, or threshold, of weight percentage, and any time the percentage weight of an asset moves out of this range, it will automatically trigger, resulting in all holdings to be at their designated percent weights.

This is most commonly used for symphonies that are only target weights without “branch switches” or conditional statements. When a conditional statement is met and a branch switch happens, it doesn’t matter what drift percentage has been set, as the symphony will fully rebalance into the other branch.

An example

Let’s say you have 2 assets that you want to hold 50%/50%, asset A and asset B. If you’re using a calendar-based trading strategy, set to daily, Composer will rebalance your holdings back to 50% in each every day, even if your holdings are just 51%/49%. 

With threshold trading, if you set your threshold trigger to 10%, Composer won’t trade either asset until your holdings get to over 60%/40% in either direction. Once this happens, we will rebalance your portfolio back to the designated weights of 50%/50%. In a backtest, you’ll be able to see the trade history in your Historical Allocations table, which will show you how many days your symphony would have traded in the backtest.

The main advantage to using threshold trading is that your symphony may trade less often, which results in less paid in trading fees and slippage. Additionally, threshold rebalancing can be used as a form of risk control, as it can prevent allocations from deviating too far from the designated weight in market fluctuations.

Where you can find threshold trading in Composer

When you’re in the Editor and building a symphony, on the far left column, you’ll see an option for “Trading Setting”, which lets you toggle between calendar-based trading and threshold trading. Here, if you select threshold, you can then also set the drift threshold for the percentage used as the trigger for trading. 

Threshold trading in Composer