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Introduction, Portfolio vs. Trading Strategies


Not everything shared here is the conventional way of trading or methods or even terminology.

Let’s say you have a company, and in your company you have 3 unique products that target different market segments. For each product you have a department that make strategies and plans on how to produce, store, sell, and market each product. That department is your trading strategy. They have their own budget, risk management, accounting (money management).

Each department acting as a company in the company. While the 3 products departments do their jobs, they follow the company management target. After all it is company money.

Each has a goal for company total revenue.

Product A 3%
Product B 10%
Product C 5%

If any of them don’t meet their target or they cause losses, they affect the company's overall strategy to grow by 18% of their revenue; so if they lose money, the company might kill that product line or invest more in another product line or open a new product line.

So a portfolio is your trading strategies umbrella of goals where they all must meet your target. After all the balance is 1, and all strategies share that balance. You must account for money management risk management in the tactics of trading.

If you have $100,000 and 4 strategies, it doesn’t necessarily mean you'll trade 4 different pairs. It might be you trade the same pair in 4 different ways.

When you start, don’t start designing a trading strategy - start with your portfolio. It’s the framework of how strategies should be designed.

“Start with your portfolio. It’s the framework of how strategies should be designed.”

Portfolio Strategy

Most people focus on the how to trade first, which then ends up with a mash of many trading strategies that don’t work well together. So let’s design a simple portfolio strategy first.

  1. Know how much you can put in.
  2. Are you adding to that initial deposit every month or week from external sources like a business or salary?
  3. How often do you want to withdraw?
  4. How much you want to reinvest from your profit? Let’s say you withdraw every month - what do you do with the profit for that month? Isolate it - use it as buffer or reinvest it.
  5. How much leverage do you want to use? The higher your leverage, the more risk you’re taking on.
  6. How much do you want to trade per order? How many orders at same time?
  7. How many pairs or commodities you want to trade with at what time frames? What frequency? More pairs - lower risk, but harder to manage manually. More pairs mean that you have less orders you can open at the same time.
  8. How many strategies you want to implement? More strategies mean less risk but very hard to manage and synchronize. For example, one strategy uses 1 order the other needs 10 orders to work. The 1 order strategy might use so much money that it prevents the 10 order strategy from finishing its work.

Risk and money management will be detailed in later chapters.

Designing Trading Strategies

A trading strategy includes all the parts of portfolio strategy, additionally, when to open orders, when to close them, what to do if market go against them, an awareness of the other strategies, target profit, and the risk you aim for.

Your portfolio strategy dictates your trading strategy. You saw me throw away so many profitable strategies for various reasons. It’s all related to the portfolio strategy.

For example, I can’t have a strategy that returns a high profit but has a high drawdown at the same time. Drawdown means I can’t use the amount in my balance for other pairs due to high risks, where margin stop calls happen and losing most of my capital or balance.

Many people make the mistake of designing a strategy beyond their balance limits and neglecting their portfolio strategy. They’ll shop for signals or strategies online that work perfectly for others but badly for them.

While designing a trading strategy, know its limits. Some strategies work only in very specific conditions or were designed during specific events which make them overfit for these specific scenarios.

Two Types of Strategies

Strategies work with any and all conditions; normally they are much less profitable and risk averse than others, or worse, they’re extremely risky with high exposure of capital. Scenario specific strategies which are specialized ammunition you only use once every now and then but when applicable they can be extremely profitable

These 2 types define the type of trader you are - with the first type you are a long term player. The second is for those who are always trading and analyzing. Fully active traders with an arsenal of tools can be very ambitious but normally they don’t have a defined portfolio.

You can have more than 1 portfolio, but the more you have, the harder it is to manage all of them. I rely heavily on automation to avoid management issues and have notifications for specific situations so I can make critical decisions as needed.

Luckily you will have the FxS function script to allow you to write code for MetaTrader and automate stuff. Most of this headache will be easier on Decimal Trader. Alternatively you can code in MQL, which is not that easy. You should learn the basics before even attempting to do any of this.

Laws of FOREX

Two Important Laws of FOREX

  1. High risk, high profit; low risk, low profit
  2. High capital distribution, low risk; low capital distribution, high risk

These two laws can zero out each other and work really well, but at risk of high management effort so any mistake cancels out the balance. That’s why emotional traders fail.

You can have high profit and low risk without breaking the laws of FOREX by distributing your capital over many pairs orders and strategies and time frames. But at that point you’ve shifted the risk to you or your management system. So if you manually do that, you’ll need staff or automation or else you’ll be screwed. Funds have staff just for that, because automation management is not that easy.

You can achieve the same effect trading manually, and this will be the first trading tactic taught.

Key Concepts

  • Don’t just focus on trading strategy, consider your portfolio strategy
  • Buying signals is fine as long as it works with your portfolio strategy
  • Know the limits of your trading strategy
  • Don’t rely on just one trading strategy - diversify!
  • Risk management is critical
  • Making money is important, but NOT losing money is even more important!
  • Create a system and trust it for that given situation
  • Information overload is real - more orders, more mistakes

Lesson 2