Trading Portfolio

Hello.

I just finished to read E. Tomasini's book.

Since I trade only Forex at the moment I was wondering if it can be a serious limitation in Portfolio Trading, and overall about profitability.

I am wondering if is wrong to trade a set of pairs which are correlated to each other applying a "Trend Following" & "Counter Trend" strategy.

For instance if I test those strategies and I go live trading assets which are correlated to some extent "EUR/USD", "GBP/USD", "USD/CHF", "AUD/USD", "USD/JPY".

I had a look to some system on MyFxBook and I found a quite famous strategy that trades many assets as portfolio with a good level of success for many years now.

http://www.myfxbook.com/members/autotrade/wallstreet-forex-robot-real/95290.

I would like to better understand Portfolio Trading, with particular attention to these points:

- 1 How many strategies I can add on a portfolio.
- 2 How do you determine the correlation between the two systems and what threshold you use to avoid high DD.
- 3 Should I add up different strategies on the same asset rather than trying to diversify through other Fx Pairs.

Any advice is really welcome.

I look forward to hearing from you.

Regards, France.

I have been exploring portfolio trading myself for a couple of weeks now. From what I have gathered you need to diversify on as many instruments as possible, with as many strategies as possible. The less correlated the result equity curve per system is, the better your drawdowns will be and the smoother your equity curve will grow. When you begin to look deeper into portfolio trading, the positives are a lot and the one negative that stands out is how much money you will need to start trading. The more the strategies and instruments, the higher the capital required, mostly.

Thank you for writing.

Can you explain me exactly how you proceed to select the assets and what you mean for less or high correlated equities ?

How do you measure it ?

What are your thresholds ?

Regards.

What I meant to say was the less correlated the resulting equity curves are the better the systems hold up against drawdowns. But the equity curves must have positive expectancy or you are just playing in sinking sands. Well you backtest a system on a time series such EURUSD and zorro should produce an equity curve. If the equity curve does show growth and you want to add another profitable pair to the system, you run the same logic on the new pair and build a mean-variance matrix on the equity curves and do the portfolio optimizations as the finance text books preach.
Here is a link link that discuss the topic in-depth.
But I personally look to use a 1/3 portion of the optimal f in allocating funds to trading systems in my portfolios.

Hello liftoff. Thank you for the explanation.

If I understood right from the article, I have to calculate the correlation using the resulting equities of the two systems.

Ideally very less correlated equities will help me to diversify.

I am trying to find time to go through math in order to understand more in depth.

Can anybody suggest me any reading about Portfolio Optimization for a proper dummy ?

Regards.

Hi france, liftoff,
just a couple of citates from Ralph Vince (ISBN 978-0-471-75768-9) which seem relevant to this topic.





Rather than trading at a fraction of OptimalF instead of full OptimalF, it's better to split the whole equity (e.g. 1000$) into passive part (800$) and active part (200$). OptimalF is then calculated after subtracting passive part from (hopefully increased over time) whole equity (e.g. after 100$ are earned, OptimalF is calculated based on 1100$-800$=300$; you do not reallocate after each trade or week or month - passive part remains the same in $ but gets hopefully less and less percentually).

Rather than allocating a part of whole equity to each system, it's better to find OptimalFs in portfolio. This is what Ralph Vince calls "terrain peak". I think the coordinates of the peak will greatly depend on if systems are trading simultaneously or sequentially (like day birds and night birds never hunting together), and also on how corellated their equity curves are (if there are no worms for day birds, there are not any for night birds either).

Tomasini suggests an appealing rule for taking systems in to and out from portfolio - system's individual equity curve plunges below or goes above its own moving average; at the same time, suggestions about allocating partial equities to systems are more fuzzy.

Vince suggests to treat test results as a proxy for likely future results, and to look for "terrain peak": what should be each OptimalF in order to maximize the geometric mean of the portfolio (logically, this will maximize the return under re-investing). A zero value will tell me to take a system out of my portfolio.

Vince also suggests not to be fixed too much on maximum drawdown seen during the test. It's just a single outcome from a universe of possible ones and thus not worth beeing a measure for making position sizing decisions. Instead, OptimalF gives an esimate (theoretical, but reasoned) of what drawdown to expect. And yes, it will be huge when trading at OptimalF, that's why I ought split the whole equity into passive and active parts, as mentioned above.

Sorry for this citate-loaded long post. My secondary purpose is to gain better understanding of the topic by attempting to re-tell what I learned.