Portfolio Diversification & Position Sizing

Discussion in 'Risk Management' started by RogueTrader92, Mar 30, 2021.

  1. too much diversification and position sizing reduces the chance of big losses but also the chance of big wins..

    I am yet building my capital to start trading on my own, i feel that the best strategy to have small position trades and consistent profit on short term trades. How doable is this strategy and do i need any modification to my way of thinking ?
     
    Riley.R likes this.
  2. newwurldmn

    newwurldmn

    First find your source of positive expectancy. Then figure out how best to maximize your profit on it.
     
    stepandfetchit and cruisecontrol like this.
  3. It's definitely doable, and if you do it right you can have a very smooth ride. I would agree it is the best strategy by some measures. On the other hand you will need a lot of edge to overcome the friction from frequent trading, and it will take a lot of time to manage all those trades unless you are able to automate completely.
     
    qlai likes this.
  4. Tongue in cheek (kinda):
    1) Note that "expectancy" is dynamic (with respect to the market) and can go negative for an extended period of time, taking the "fun" out of it! eg... "wheels can come off wagons"
    2) Many things make a lot of sense if you don't think about it much! eg... As Simple as Possible but no Simpler is the golden rule! However, the "no Simpler" portion seems to always be ignored!
     
    tomorton and .sigma like this.
  5. Reduce portfolio covariance. In other words, make sure your trades are not correlated with each other.
     
    RogueTrader92 likes this.
  6. good one
     
  7. In terms of trading, as you mentioned
    In terms of active trading, as you mentioned short term trades, from my experience it is best to have multiple positive expectancy systems. Even with a positive expectancy market conditions can completely change the efficiency of a system. I currently run 3 systems, two that are indicator-based, and one that is completely discretionary. This allows me to still have a positive expectancy on my overall portfolio rather than trusting in one system. This way, if one structure(system) gives out on the skyscraper(the portfolio) it will still be held up. Just a thought, but your idea is definitely not incorrect.

    The systems is a great way to reduce portfolio covariance, great point by @longandshort
     
    tomorton and RogueTrader92 like this.
  8. The way you define position sizing is usually done in percentages. A portfolio starts at 100%. ... The way to do this is through diversification, but proper diversification requires a good position size approach
     
  9. Yup, that’s true. Portfolio diversification will minimize your loss. And this strategy you’re talking about is absolutely doable and you can reap some good profits from it.
     
  10. Riley.R

    Riley.R

    That definitely sounds like a good strategy,try backtesting it at demo or a micro account for verifying if its working for you.
     
    #10     May 13, 2021