What Markets Should You Use for Your Portfolio?

A couple of years ago I made a fundamental mistake: until then I had my portfolio focused mostly on index futures markets. For years I have had with this approach really nice results. But that year, I experienced how frustrating it can be, to go through a couple of periods when index markets are underperforming. That was when I have decided to work really hard and improve my intraday portfolio composed of automated trading systems (ATS).

Smooth equity isn't just about the systems - it is a smart combination of markets, timeframes, trading approaches, and, later on, also innovative position sizing. When you think about it, there is the logic behind it.

Even though in times of financial shocks and surprises there is barely any negative correlation in the markets, there are still some markets which live their own lives - and they offer us smart way for diversification.

The result is that when one of the market groups is not doing well, there is another, which compensates the losses from the first one - and makes the equity overall smoother.

What market groups you should use

This is the first question - what markets groups you should combine in order to get the desired result - smooth equity.

We have following futures groups: Index, Currencies, Metals, Energies, Bonds, and Grains. Every market group lives its own life and you can find at least one noticeable market in every group that can represent the whole group.

Personally, I have experimented with all groups and, besides currencies, I can highly recommend any combination. The currencies are, from ATS point of view, highly unstable (for example in Forex, ATS are failing really fast and it is really difficult to find profitable ATS for Forex). It also depends on how many markets you create a system for, and how many markets you trade with your account. But even with rather a small account, you can trade 3-4 markets. For such cases, I would recommend following combinations:

Combination of 3 markets (pick one market from each market group):

• Index
• Grains
• Energies

Combination of 4 markets (pick one market from each market group):

• Index
• Grains
• Energies
• Bonds

Nowadays, I trade several portfolios that are based on the 4 groups mentioned above. Here is an example of one of them (breakout strategies, 30-minute chart, 5 markets, equity for the last 8 years, trading 1 contract per system):

The net profit for all 8 years and all markets combined is 421,548 USD and the max drawdown is just 12,315 USD.

Smoothen the equity by using multiple timeframes

The second way how to smoothen your equity curve (in a combination of trading several markets from different groups) is using several timeframes for every market (ideally without changing system parameters, or with just small changes).

It is more like a final touch than smoothing the equity, but it brings up an interesting idea that it might be better to add new timeframes instead of trading multiple contracts in the same timeframe. Another option is to optimize also the timeframes (check the results of your system on several timeframes and pick one timeframe for each market - it can, but doesn't have to be the same) - but then, we need to ask ourselves how much of over-optimization this is.

Anyway, here is another example of the portfolio mentioned above, when for every market we add the second, 15-minute, timeframe. The equity is slightly smoother, the drawdown hasn't increased so much, but the profit has.

The net profit is 812,457 USD and the drawdown is 18,815 USD.

What systems to use

The best variant is to have in a portfolio both trend and also counter-trend systems. Still, it is sufficient to have a system that can smartly react on both situations (equally, if possible).

I am specialized in breakout strategies and I can say that it is all you need to have a balanced portfolio across several markets - but only if you have systems trading both long and short. Sometimes you just need a simple breakout strategy that doesn't have great performance (that you wouldn't trade individually), but in combination, you have a nice portfolio with smooth equity curve. You need to constantly focus on the performance of the portfolio - it is more important than the performance of underlying systems. Remember when there is a huge drawdown for one market (system), the others can compensate that and you can still make a profit.

For that, you need to have a quality workflow setup how to create new and new strategies, as you will need a lot of them and for several markets. At the same time, it is crucial to have a setup of robustness testing procedures so that we can add to our portfolio really robust strategies.

Article Source: Here

Financial Stocks

As long as there have been companies and money to be made there have been stocks. What are they? Well, they are something that represents ownership in a company, if you have stock in lets say, a major beverage company then you own a little bit (or a lot, depending on the number of them you have) of that company. This means that you can help elect members of the board and vote on corporate policy because you are an owner.

Companies that can offer stocks have to be public companies, that means that anyone with the money and the know how can purchase the stock, but not just any company can instantly arrive on the world markets as there is a process and of course many listing requirements that have to be met. That being said, there are ways of smaller companies trading stock and that is trading 'over-the-counter' which is what happens when unlisted (companies not on the official stock exchange) have stocks to buy, sell and trade.

The first ever stock for sale was established by the Dutch East India Company back in 1602. Today there are thousands of them exchanged, with the largest of them all being part of the New York Stock Exchange or the NASDAQ. There are of course other major trading centers around the world, most notably the London Stock Exchange and the Japan Stock Exchange.

Stocks generally outperform bonds and although they are both considered securities they do have their own strengths and weaknesses. A bond is something you buy for the long term, maybe up to fifty years, but stocks exchange hands all the time, sometimes many times a day. The idea is to buy when the price of them is low and then sell them when the price is high. This can change throughout a day, so you may make money and lose money several times during the hours the Exchange is open.

A downside to them is that if the company that issued them goes bankrupt, you'll have to wait in line for any reimbursement. The company creditors get first crack at any money and as a stockholder you are far down the line.

Like with any investment, there are ups and downs, pros and cons associated with being a stockholder in a company. Some will keep shares for hours while others will sit on them for years, it's all in what you hope to achieve in the long run.

Article Source:Here

Bonds are an integral part of every Canadian's portfolio for good reason. Bonds carry the "promise" of fixed income with regular stable cash flows. But with interest rates hovering at all-time lows, the pressure to make every cent count has never been greater. Creating such exposure smartly can make all the difference in the returns.

A portfolio for the average Canadian probably contains fixed income securities, otherwise known as bonds. Bonds are particularly attractive to those investors at or near retirement as they look to replace their regular and stable salary with a similar certain stream of interest income.

Unfortunately purchasing bonds in Canada is not as easy or as cost effective as purchasing stocks. Unlike equities which trade on an open stock market exchange with fully transparent bid and ask prices, bonds in Canada have to be purchased through a 'dealer network' which effectively removes all the efficiency and transparency of a fully functional liquid market.

This is where it gets unpleasant for the retail investor. Compared to gigantic financial institutions who invest billions of dollars with pooled assets, it is extremely challenging for the retail investor to purchase a bond with the similar efficacy as these large behemoth financial institutions.

The only thing that might be worse than purchasing bonds through Canada's dealer network is purchasing a bond mutual fund. The average expense ratio on a Canadian bond mutual fund is close to 1.75%. In an interest rate environment where long term yields are hovering around 3.5%, that's like sharing my hamburger with a stranger and him taking half of it in one bite. I don't think so!

So how can the retail investor get the fixed income exposure with a handsome seniority and a tight bid ask spread? The average investor should consider Bond ETF's to create the fixed income exposure in their portfolios.

ETF's are managed by big financial institutions, and trade on any number of stock exchanges just like your favorite stock. The benefits to the average investor are numerous.

A bond ETF, is basically a bunch of different bonds bundled up in a portfolio and traded in the stock market. Unlike the individual bonds themselves, there is substantially more liquidity in bond ETFs, which makes for a tighter bid ask spread. Basically, investors can easily exit their position at any time without the cost of large transaction fees.

This advantage alone is all retail investors should need to convince themselves that bond ETFs are the most efficient way to gain exposure to the fixed income market. In addition, these Bond ETFs have huge amounts of assets under management and have superior purchasing power. For example, total assets under management for the major Canadian Bond ETFs is in excess of 2 trillion dollars. Guess what - that gives these ETF companies huge leverage in negotiating with the best bond issuers. Not only are they able to trade in and out of bonds at much better spreads than you or I could ever get, but they also have access to the best issuers.

Article Source: http://EzineArticles.com/9606126