One of the most sombre aspect of trading is portfolio trading. There is no literature, no articles, no shared experience. Portfolio trading is something that goes beyond the “wanna be rich quickly” attitude many retail traders have. Since the most part of traders does not approach trading with a portfolio mindset – they just focus on what Dax did yesterday – portfolio trading is the missing point in the current landscape of trading. Questions about portfolio trading are easy to grasp but very difficult – if not almost impossible – to reply since there is not a wide offer of commercial software that work in such environment with the praiseworthy exception of Rina Portfolio Maestro.

For example the current view about portfolio trading is that the stop loss on the single systems that composes the portfolio should be placed in a way such that if all the single systems were stopped out the total loss on the whole portfolio is still affordable. Example: if the maximum loss on a single system is 1%, you trade 10 systems and the “ruin” that is the point where you stop definitely to trade is 10%, then we can calculate the risk of ruin that is the risk that all the systems will be stopped out together. Let’s put this into another way. What the trader follows and what makes the difference is not the single equity lines but the portfolio equity line. You will go bust or you will make a fortune just on the portfolio equity line, nobody cares if you make a million with a hand on a single system and you lose 2 millions with the other hand. What matters is the final result which is the portfolio equity line. Single trades do not exist because they melt down together creating different portfolio trades. What is the difference in between a situation where an individual system loses 10.000 dollars and another situation where 10 systems together they lose 1.000 dollars each ? There is no difference. If you apply the current view and you apply a stop loss on the single systems it will happen that you will not stopped out on certain trades that on the contrary will be stopped out if you apply the portfolio logic with a portfolio stop loss.

This simple rule can be extended furthermore with the profit exits: what is the difference in between 10 systems making a profit of 1.000 dollars each and a single system making 10.000 profit ? If you are watching the world sitting on the portfolio attitude these two situations are the same, if you are trading in a “single system single profit” approach then everything is diverse.

I do not want to give here an ultimate reply to questions that are hovering around in the trading arena since decades but just to put the readers on their guard over the “single system” approach, which is not a wrong approach but simply it is an approach among other approaches.

If you wear this hat of the portfolio approach what you are considering to trade is just the portfolio equity line. Another tip would be to create an ADX indicator for example just on the portfolio equity line and to trade the portfolio simply when the ADX is growing above 25 or simply is growing higher and higher for 15 consecutive days.

You can even filter out the trades with a moving average of the portfolio equity line: if the equity line crosses above the moving average of the equity line then you place all the trades systems are producing. Viceversa no trade is placed. This feature is already implemented in almost all the portfolio software around like Market System Analyzer by Mike Bryant (www.adaptrade.com)  or Rina Money Manager (www.rinafinancial.com) . Results are mixed and vary depending on which systems you are putting into the portfolio.

In conclusion: stop trading just one system over one market and start considering a multimarket multisystem approach that will avoid to be trapped in trendless market situation and will leave you always on the top of a trendy situation. To do that you need to work and research about portfolio equity line and not only about the single equity lines. As a personal recommendation I would tell you that every effort in this direction is worthwhile.

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About Author

Emilio Tomasini is Chief Editor of the Italian edition of TRADERS’ MAGAZINE (www.traders-mag.it), the leading monthly publication in Europe for trading and investment, and since 1999 he organizes the TRADERS’ CUP the most important real money European trading competition (www.traders-cup.it). His personal weekly free newsletter L’Indipendente di Borsa (www.indipendentediborsa.it) is one of the most reputable Italian financial media and counts more than 100.000 readers. His website in English is www.emiliotomasini.com

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