Capacity measures if the DARWIN’s percentage performance falls as its number of investors grows. The higher the score, the more capital the DARWIN should be able to handle without its returns being affected by the divergence.
Darwinex only calculates Cp once a DARWIN has been created from a strategy.
Divergence Sensitivity Chart
Every additional euro under management hurts a strategy’s profitability: by using up finite market liquidity, it moves the market price (increasingly) against it!
This chart compares a strategy´s historical performance with hypothetical one: what would have happened if market spread at the time of trade had been:
◦ 0.2 pips
◦ 0.5 pips
◦ 1 pip wider?
All other things equal, a strategy is more sensitive to spread:
- The more frequently it trades: a scalping strategy with small profits on many trades is more sensitive to spread than a swing strategy achieving the same profitability, on less trades - by making more per trade.
- The more homogeneously leveraged: given a risk appetite (VaR!), the more spread leverage is across trades, the more sensitive a strategy is to spread. A strategy with leverage scattered from 1:1 to 9:1 is more sensitive than that with constant 5:1 leverage, because liquidity isn't evenly matched across ticks of market depth
High sensitivity to spread is not necessarily bad, because
- we track the outcome of spread increases, without
- questioning the underlying root-cause to that spread increase!
Spreads widen because of missing liquidity at the point of placing trades. Strategies trading at times of high-liquidity structurally overcome spread sensitivity, i.e. we're factoring all relevant factors in tracking investability!
Don´t miss our latest webinar on Capacity Management in which we will cover:
1- A review of the DARWIN replica process
2- A primer on liquidity provider economics and
3- General and practical guidelines on how to maximise the capacity of your DARWIN.