Method GeWorko is a new stage in the development of portfolio trading and analysis

by creating personal trading instruments

Theoretical bases Theoretical bases

The concept of GeWorko Method is similar to currency exchange rate, when the value of the base currency is expressed in units of the quoted one, but in this method the base and the quoted currencies are replaced by two combinations of assets or two portfolios. The sum of the values of all assets in each portfolio, taking into consideration weight coefficients, gives an absolute dollar-denominated value to it. When comparing the value of the portfolio in the base part with that in the quoted part, the method calculates a ratio, which is considered to be the “price” of the new composite instrument and can be interpreted as the value of the base portfolio, expressed in units of the quoted one. Here it is assumed that all used assets have a value, expressed in US Dollars (or just converted into USD).

For the practical application of GeWorko Method a technology, called Personal Composite Instrument (PCI), has been developed. The technology is implemented on NetTradeX trading terminal as a convenient interface for creating, modifying, reflecting on the charts and trading PCI.

In the process of creating a personal instrument by combining assets, portfolios B (base) and Q (quotation) are created:

Ai- value per unit of asset i in portfolio B, expressed in USD
Vi- volume, the number of units of asset i in portfolio B
K- the number of assets in portfolio B
Аj- value per unit of asset j in portfolio Q, expressed in USD
Vj- volume, the number of units of asset j in portfolio Q.
N- the number of assets in portfolio Q

PCI, created by GeWorko Method, can be presented by the following equation:

notation “ / “ means "Quoting"

In order to calculate the value of PCI at a particular moment in time T it is necessary to carry out the calculation according to the following formula:

- value per unit of asset i in portfolio B at the moment T, expressed in USD
- value per unit of asset j in portfolio Q at the moment T, expressed in USD

The purpose of the Method The purpose of the Method

The method is primarily for the analysis of financial markets, the study of complex interrelations between assets and their combinations. The method provides convenient technology for technical analysis of complex asset portfolios, the study of the behavior of portfolios, based on historical data. Absolute flexibility of the method and its practical implementation on NetTradeX trading platform are achieved by giving each asset an individual weight in the total structure, including both long and short positions in the portfolio, using hundreds of different asset classes.

The method allows the trader to realize his trading ideas and strategies by personal composite instruments, to check the behavior of his instruments, based on long-term historical data, to find the optimal ratio of the projected profitability and risk tolerance.

GeWorko Method application in practice allows you not only to quickly transfer your ideas to trading-analytical system and to estimate them based on historical data, but also to trade created personal instruments – you can find the details of trading realization on Personal instruments page. In fact, the trader is not restricted by the number of available financial instruments any longer, getting an opportunity to create personal instruments, reflecting his own trading ideas and having its graphical history. The method allows to turn two asset portfolios into a new trading instrument, but there is a great variety of such compositions. As a result, practically unlimited number of new instruments for analysis and trading become available for the trader.

Sphere of application Sphere of application

The study and practice show that GeWorko Method application can be exclusively useful for various ideas and trading strategies. We will bring only a few of possible examples of its application below (from simple to complex).

Conversion of the quoted currency

The trader may need to trade the asset (due to some trading ideas or investment restrictions), which is quoted not like in common currency pair, but in another currency at the trader’s discretion. The trader may get just a new cross rate, but the method can be applied for non-currency assets, as well. For example, trading Gold, quoted against the Australian Dollar -there is no such instrument in the common market – in this case the trader creates «XAU/AUD» personal instrument, gets all charts on it for full analysis and a trading opportunity.

This class can also include the opportunity to quote a currency (or even an asset) against a subset of common instruments, used by the trader. For example, a trader, due to his investment preferences, wants to analyze and trade the Singapore Dollar, Brent Oil, Gold and Caterpillar Inc. stocks, quoting all these instruments against the Australian Dollar (thereby choosing AUD as the funding currency). In that case, it will be enough to create four PCIs (it takes several minutes) - “SGD/AUD”, “#C-BRENT/AUD”, “XAU/AUD, “#S-Cat/AUD”.

Pair trading on two assets

The strategy of popular pair trading is based on finding differences in the dynamics of price movements in two assets. The prices of these financial assets can respond to the same economic factors, but the speed and sensitivity of the reaction may be different; on the other hand, several factors may affect these assets in different directions. For example, the trader creates a personal instrument on two stocks of high-tech companies «# S-Google / # S-Apple» (giving weight to each component in the structure), expecting within his strategy that Google stocks will grow faster than Apple stocks with general growth of high-tech market, and in a falling market Google will fall slower than Apple. The trader creates this PCI and gets an opportunity to test his assumptions, based on the deep history, as well as to trade this personal instrument (in the deal of buying this PCI the component of Google stocks will be bought, and the component of Apple stocks will be sold; in the deal of selling - vice versa). Note that this scheme in its objectives and results is similar to the scheme of popular spread trading strategy.

This class may also include a strategy of "Trading around the average", which is based on a stable long-term correlation between two assets, but the short-term correlation may deviate from the average level and come back to it. For example, in order to analyze the relation between WTI oil and BRENT oil (the difference in the prices of these assets arises from the peculiarities of their pricing), the trader can create a PCI, consisting of "OIL / # C-BRENT» (by ticker on our terminal), analyze this relation based on the deep history and trade this personal instrument at peak deviations from the average.

Simple portfolio of assets

Popular trading of asset portfolios is used by private traders and fund managers within a large number of investment strategies. A trader can quickly create several different simple portfolios in the form of PCI with all components quoted against the U.S. Dollar, compare these portfolios based on graphical analysis of deep long-term history, select the best portfolio, according to his criteria and trade the selected PCI. Moreover, the composition of the portfolio can be quickly modified with changes of the economic situation and change of investment priorities.

Traders get an opportunity to create portfolios, based on different principles - by asset class, by industry, by country, realizing their personal portfolios, similar to popular indices of ETF (Exchange Traded Fund). For example, a trader can analyze and trade a portfolio of energy assets (available at our terminal in the list of CFD Commodities), for these purposes creating the PCI with the composition of "(# C-BRENT + # C-NATGAS + # C-HEATOIL) / USD" and with weights of components, according to his investment preferences. Of course, the trader can create a similar portfolio, quoted not against the USD, but in any other currency or asset.

The structure of two portfolios

There are complex investment strategies associated with buying a portfolio of assets and the simultaneous selling of another portfolio. Within Geworko Method one portfolio is base, another one is quoted – in the process of trading when buying such a PCI, the components of the base portfolio are bought and the components of the quoted portfolio are sold. For example, a trader can implement a strategy of buying U.S. stocks and selling European indexes in certain investment periods and reverse strategies in other periods. For that a PCI is composed "(DJI + SP500 + Nd100) / (DE30 + GB100 + FR40)" with component weights equal to each other (in dollar prices of respective CFDs on indices).

Analysis and trading of such complex portfolios can be included in a new class of pair trading on two portfolios (in its objectives and results, this scheme is similar to spread trading of portfolios).

In order to work with PCI by GeWorko Method, you should download the terminal and open an account in NetTradeX platform.

You can learn how to create and use PCI through GeWorko Method on NetTradeX terminal on "Quick Guide" page.

We also regularly publish articles on the application of GeWorko Method in "Articles about the method" section.

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