Home Members
Home Free Trial Trades FAQs Join Now Contact Us Members
 

Creating a Portfolio

How much do I put in a position? How many positions should I have? What do I do if I'm adding money into my account? Those are questions most people don't really give much consideration. I for one believe these to be the most essential questions. In fact, I have tested these questions over and over.

What is the number of positions where I can keep my reward/risk ratio at an optimum level? Not only that, but do I just rely on one trading system, or spread money around several?

What I have found works best in my testing is spreading money evenly between 10 positions per system...which of course implies using several systems to spread your money around.

Using 10 positions allows you to trade most of the money allocated to each system (so you're invested as much as possible), and it diversifies enough so that one catastrophic event (such as a stock going to zero...which has not happened to me yet) does not set you back too long.

How you trade and how often is (like everything else) a personal decision based on your risk tolerance and dedication to trading.

All of our trading systems have great track records, but vary in how often they trade:

 

System Name Description Trade Direction Performance  (1995-2006) Best Year Avg Trades per Year Max Open Positions
             
Base Hit Fast buys and high win % to take advantage of dips within a trend.
 
Long
only
+4,923% +63.8% 240 10
Profit Taker Quick buys for 1-5 day holds.  Works even during bear markets. The best gain/pain ratio of all our systems.
 
Long 
only
+19,454% +238.6% 166 10
Profit Taker 2 Uses a longer time frame for 8-16 days holds. The trades are simply bought on the open the next day. 
 
Long 
only
+4,517% +142.2% 83 10
Breakout A trend following system that tries to catch the big moves in stocks. Trades less frequently (about 67 times a year). The positions are simply entered on the open. Most trades last 15-40 days.
 
Long 
only
+5,888% +159.3%  67 10
Smart Money Index Trader Using the Smart Money indicator, this system trades the S&P 500. It's either long or short at all times (about 3 trades a year).
 
Long & Short +10,157% +142.7% 3 1
SP Slugger A quick S&P 500 trading system to take advantage of price inefficiencies. SP Slugger trades for the quick base hit several times a year. 89% winners since 1995.
 
Long & Short +10,633% +156.0% 20 1
Breakdown This trend following system trades only when the Smart Money indicator gives the green light to short the market. It trades less frequently, and positions are entered on the open. Short 
only
+1,728% +147.8% 27 10

Choose the systems that work best for your particular style of trading. They are all included as a member.

I never know when I'm going to win or lose. My odds are sometimes no better than a coin toss (but the winners are much bigger than losers). Would you gamble everything on a coin toss? Most traders blow up their account because they have no discipline or money management rules. I hope you keep that in mind when you decide how much to risk on your next trade.

 

Here are a few ideas for portfolios that I've tested:

(SMI = the Smart Money indicator)

 

Portfolio A:

65% allocation to Profit Taker 2 (Long only when SMI is bullish)

35% allocation to Breakout (Long only when SMI is bullish)

60% allocation to Breakdown (Short only when SMI is bearish)

40% allocation to Smart Money Index Trader (Short only)

 

This is a fairly easy system to trade. Positions are all bought on the open, and there would be a max of 20 stocks to deal with at any one time. When it's time to short the market, there will be a max of 11 positions open at once. The Smart Money Index Trader simply opens a short position on the S&P 500 (using SPY).

The following test results use 2-1 margin and accounts for margin interest, slippage, and commissions.

Yearly Performance Summary
Year  Days  Closed Balance  End Total Equity  Total Equity Gain  Gain % # Trades
             
1995 365 $133,034.81 $150,813.89 $50,813.89 50.8% 198
1996 366 $167,913.39 $172,341.26 $21,527.36 14.3% 201
1997 365 $293,876.66 $291,779.42 $119,438.16 69.3% 127
1998 365 $525,340.25 $663,802.56 $372,023.14 127.5% 169
1999 365 $1,456,249.26 $1,412,435.60 $748,633.04 112.8% 182
2000 366 $2,294,117.28 $2,730,677.66 $1,318,242.06 93.3% 97
2001 365 $5,311,904.74 $5,959,607.68 $3,228,930.02 118.2% 133
2002 365 $12,629,280.67 $12,860,111.16 $6,900,503.48 115.8% 137
2003 365 $21,998,646.18 $25,027,947.57 $12,167,836.41 94.6% 237
2004 366 $39,755,998.47 $39,450,562.10 $14,422,614.53 57.6% 234
2005 365 $49,752,733.53 $52,084,061.18 $12,633,499.08 32.0% 236
2006 365 $95,456,368.36 $105,753,618.51 $53,669,557.33 103.0% 257
2007 39 $110,898,816.84 $110,898,816.84 $5,145,198.33 4.9% 53

CAGR = 70.89%/year

Wins = 1184     52.4%

Losses = 1077   47.6%

Percent Profit Factor = 2.21

Max DD = 29.53%

MAR = 2.40

Martin Ratio = 9.68

Longest Drawdown = 12.3 months

 

Portfolio B

100% allocation to Profit Taker 2 (Long only when SMI is bullish)

60% allocation to Breakdown (Short only when SMI is bearish)

40% allocation to Smart Money Index Trader (Short only)

 

Here's another example that uses fewer systems to diversify between. A maximum of 11 positions would be on at once. The results are outstanding, but putting too much into any one system can be a drawback with a large portfolio.

Yearly Performance Summary
Year  Days  Closed Balance  End Total Equity  Total Equity Gain  Gain % # Trades
             
1995 365 $140,585.98 $144,239.25 $44,239.25 44.2% 110
1996 366 $157,138.48 $156,783.63 $12,544.39 8.7% 107
1997 365 $261,681.99 $259,815.00 $103,031.37 65.7% 74
1998 365 $481,521.78 $507,645.85 $247,830.85 95.4% 112
1999 365 $1,287,639.14 $1,249,015.00 $741,369.15 146.0% 115
2000 366 $2,193,065.35 $2,611,964.33 $1,362,949.34 109.1% 73
2001 365 $5,400,547.79 $5,304,694.76 $2,692,730.43 103.1% 105
2002 365 $11,817,965.86 $12,033,791.76 $6,729,097.00 126.9% 99
2003 365 $23,204,732.81 $25,305,329.45 $13,271,537.70 110.3% 158
2004 366 $38,516,274.61 $38,221,199.92 $12,915,870.47 51.0% 149
2005 365 $52,109,110.23 $52,658,921.39 $14,437,721.47 37.8% 161
2006 365 $91,913,910.79 $94,173,843.56 $41,514,922.16 78.8% 184
2007 39 $92,824,186.81 $92,824,186.81 $-1,349,656.74 -1.4% 31

CAGR = 68.6%/year

Wins = 790     53.5%

Losses = 688   46.5%

Percent Profit Factor = 2.25

Max DD = 29.53%

MAR = 2.32

Martin Ratio = 9.07

Longest DD = 13.0 months

 

Portfolio C

30% allocation to Profit Taker

30% allocation to Profit Taker 2 (Long only when SMI is bullish)

30% allocation to Breakout (Long only when SMI is bullish)

60% allocation to Breakdown (Short only when SMI is bearish)

10% allocation to Smart Money Index Trader (Long and Short)

 

This is a much more diversified portfolio of trading systems. All systems are used with 10 positions max per system, so there could be 31 positions open when the Smart Money is Long, or 21 when the Smart Money is short.

This is a serious portfolio of stocks, which is great for an active trader with a large account. Including the Profit Taker system helps smooth out results since it tends to keep making new equity peaks on a consistent basis.

 

Yearly Performance Summary
Year  Days  Closed Balance  End Total Equity  Total Equity Gain  Gain % # Trades
             
1995 365 $138,097.83 $160,339.24 $58,718.34 57.8% 295
1996 366 $192,302.38 $200,931.22 $40,591.98 25.3% 353
1997 365 $303,789.73 $304,963.28 $104,032.06 51.8% 341
1998 365 $474,015.31 $610,065.73 $305,102.45 100.0% 373
1999 365 $1,346,954.34 $1,341,582.45 $731,516.72 119.9% 427
2000 366 $2,476,532.61 $2,797,364.50 $1,455,782.05 108.5% 388
2001 365 $5,274,330.31 $5,710,944.02 $2,913,579.52 104.2% 388
2002 365 $10,948,553.27 $11,272,687.76 $5,561,743.74 97.4% 401
2003 365 $20,127,175.06 $21,989,829.75 $10,717,141.99 95.1% 566
2004 366 $34,420,786.79 $34,320,821.64 $12,330,991.89 56.1% 599
2005 365 $41,582,027.45 $43,509,035.56 $9,188,213.92 26.8% 604
2006 365 $65,628,083.25 $74,117,034.74 $30,607,999.18 70.3% 645
2007 39 $75,319,008.05 $75,319,008.05 $1,201,973.31 1.6% 107

CAGR = 65.9%/year

Wins = 2682     48.7%

Losses = 2823   51.3%

Percent Profit Factor = 2.12

Max DD = 26.07%

MAR = 2.53

Martin Ratio = 12.47

Longest DD = 9.3 months

 

Portfolio D

50% allocation to Profit Taker 2 (Long only when SMI is bullish...5 positions max)

50% allocation to Breakout (Long only when SMI is bearish...5 positions max)

50% allocation to Breakdown (Short only when SMI is bearish...10 positions max)

50% allocation to Smart Money Index Trader (Short only)

 

I'm asked all the time whether one could trade a couple systems while keeping the number of positions held rather low. Well, it can be done, you would just skip any new trades if you have your maximum number of open positions in any one particular system (so if you already have 5 trades open with Breakout, you would ignore new orders to buy).

My research has shown that 10 positions per system is optimal, but since you're the one trading the picks, it's really up to you. Just beware that you're assuming more risk by spreading money between fewer positions. Still, the results are interesting.

Yearly Performance Summary
Year  Days  Closed Balance  End Total Equity  Total Equity Gain  Gain % # Trades
             
1995 365 $141,697.57 $164,500.68 $64,500.68 64.5% 121
1996 366 $184,653.80 $182,853.43 $18,352.75 11.2% 128
1997 365 $288,578.97 $286,015.39 $103,161.96 56.4% 76
1998 365 $710,246.52 $884,166.89 $598,151.50 209.1% 103
1999 365 $1,733,862.27 $1,672,039.53 $787,872.64 89.1% 99
2000 366 $2,580,111.24 $3,074,147.41 $1,402,107.88 83.9% 70
2001 365 $6,189,679.66 $7,999,692.96 $4,925,545.56 160.2% 94
2002 365 $14,315,940.52 $14,490,794.22 $6,491,101.26 81.1% 101
2003 365 $28,757,743.33 $33,653,867.54 $19,163,073.32 132.2% 123
2004 366 $57,159,904.18 $56,611,723.18 $22,957,855.63 68.2% 120
2005 365 $57,726,240.16 $59,280,140.72 $2,668,417.54 4.7% 127
2006 365 $98,761,907.26 $114,790,330.15 $55,510,189.43 93.6% 143
2007 39 $110,263,752.32 $110,263,752.32 $-4,526,577.83 -3.9% 29

CAGR = 70.8%/year

Wins = 709     53.1%

Losses = 626   46.9%

Percent Profit Factor = 2.22

Max DD = 29.9%

MAR = 2.37

Martin Ratio = 8.14

Longest DD = 12.4 months

 

As you can see, there are many different ways to configure your portfolio. If you're new to trading, it's often best to trade a system that gives fewer signals (that way it's less likely that you'll make a mistake, and it's psychologically easier as well). I recommend trading the Smart Money Index Trader System...which only gives about 3 trades a year.

 

Thoughts on Adding Money To
a Trading Account

So what do you do if you're adding funds to your trading account? Do you add to positions or what?

First of all, it's a good idea to have a time-schedule for adding money to your account. It could be monthly or quarterly or based on some dollar amount in your savings. Whatever the case, write it down and stick to it.

When the money you added is ready to be traded (usually within a couple business days), I DO NOT add to current positions. Instead, I wait for new signals, and calculate how much to put into each position based on how much available equity I have (called RegTEquity) in my account (which is exactly how I calculated before...except now there's more in my account).

*****Note***************************

I can already see the questions coming in. RegTEquity is simply your Net Liquidation minus the market value of options you have. So if I have $100,000 net liquidation and $20,000 in options, my RegTEquity should be $80,000. I NEVER use how much I have in options to calculate how much to put into the other trading systems. They fluctuate too much.

************************************

For example, I might have $100,000 in RegTEquity. I then wire in $10,000. If I was dividing money between trading systems like this (when the SMI is LONG):

25% Breakout (10 positions) = ($110,000*0.25)/10 = $2,750 per position

25% Profit Taker 2 (10 positions) = ($110,000*0.25)/10 = $2,750 per position

30% Smart Money Index Trader = $110,000 * 0.30 = $33,000 in SSO*

20% SMI (LEAP options) = $110,000 * 0.20 = $22,000 in LEAP options*

So next time you get a signal from the Breakout system, you would buy $2,750 worth of stock...you would not add to any current positions.

*With the SMI system, you CAN add to an open position...you just have to wait for a re-buy signal from us. The re-buy signals usually come every 1-2 months, but it's really up to the market.

For example, if I was already in SSO and I just got another re-buy signal, I would take however much I've added to my account (say $10,000) and use 30% of that ($3,000) to buy more SSO and 20% ($2,000) to buy more LEAP options. Note how I'm only using the amount added to calculate how much to re-buy.

If I was NOT in SSO, then I would buy ($110,000 * 0.30) = $30,000 worth of SSO and ($110,000 * 0.20) = $20,000 worth of LEAP options using the above example.

The verbage I'm using might be a bit tricky at first, but go through it a couple times to digest how things work.

Note that the example above is just that...an example. It's up to you on how to configure your portfolio, but I believe there's a wealth of information on this web site to give you a great guide. You're already several steps ahead of the average trader. If you're new to trading, you might want to simply trade the Smart Money signals only (you'll make less mistakes that way...and the gains can still be HUGE).

 

 

 


Click here for instant access to your free trial

 

 

 

 

 

 

 

 

 

*The results listed herein are based on hypothetical trades. Plainly speaking, these trades were not actually executed. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under (or over) compensated for the impact, if any, of certain market factors such as lack of liquidity. You may have done better or worse than the results portrayed.

Join our team. The first 30 days are free. Click here

 

Home    Members    Support    Free Trial    Trades    FAQs    Testimonials    Books    Order    Contact Us
© 1998-2008 FinancialPicks.com All rights reserved. Disclaimer :: Privacy Policy