Recently I became aware of how many investors on this site actually lose money and that´s horrible. In my humble opinion and basing on my own experience that situation can be improved. So with this guide I want to show a possible way to investors on how they can profit in the long run. Why? Because for me as a trade leader you - the investors - are the key to earn subscription fees so I better try my best to provide valuable information so most of you don´t get burned anymore. To me it´s very simple, if the current investors earn money they will stay and improve the overall situation of trade leaders like me. Also successfull investors may actually tell their friends and family of how and where they earn money so there would be even more investors and potential subscribers for my own system. Yeah, I´m very selfish I know.
Jokes aside, lets start with the actual guide.
(btw you can find my system here SmartVolaPlus)
Step 1: Find good strategies aka “do your due dilligence”
In this thread there is a discussion about that topic: What is the Best Objective Function?
My personal approach is to pay attention to the following criteria:
- markets / instruments traded and leverage used in these markets (the higher the instrument / market risk the lower the leverage I want to see. This is highly individual but you´ll get a feeling for what is right after a while)
- consistency at risk control (trade record)
- maximum single trade loss / drawdown in conjunction with trade frequency and leverage (see the bigger picture)
- Expectancy per trade
- distribution of winners -> I want consistent systems, not those that got lucky on a few good shots. (trade record)
- ratio of Expectancy per trade to conservatively expected slippage and commissions (I don´t want to have more than 20% cost per trade measured by expectancy so scalping systems usually get filtered out)
- maximum system drawdown (I´m ok with up to 40% if that drawdown only occured once but that´s personal preference. Ask yourself what you deem to be ok for a system)
- annualized compound return (I´m looking for 20-60% p.a. systems and want a good mix in my portfolio.)
- MAR ratio (MAR ratio = annual compound performance / MaxDD; should be above 1)
- length of drawdown periods (very important because long but small drawdowns can be as exhausting as steep and short drawdowns. Doesn´t mean that a system with long drawdowns is bad but there is a personal limit of what I would accept timewise. You should define your limit yourself.)
- style of drawdowns (I don´t want sudden and steep drawdowns because then I possibly can´t react in time to cut losses)
- track record of at least 12 months
Also I use the winning rate as an indicator of high risk grid / martingale systems.(winning rates over 80% are a warning sign for me to inspect the system even closer and 90%+ are no go´s)
Step 2: Building the Pre-Portfolio - correlation analysis
After I have preselected with the use of the mentioned criteria I then build a virtual portfolio with all strategies risk-adjusted. Example for risk adjustment:
System 1: MaxDD=40%, profit = 40% p.a. -> highest Drawdown of the sample so it defines factor 1
System 2: MaxDD=20%, profit = 30% p.a. -> factor 2 (40%/20%) so the MaxDD is the same as System 1
System 3: MaxDD=10%, profit = 15% p.a. -> factor 4 (40%/10%) so the MaxDD is the same as System 1
With the help of this risk-adjusted virtual portfolio I can analyze which systems correlate the least with each other so that I can maximize the portfolio MAR ratio (but keep diversification). If you can get the correlation data in a different way than I suggest you do so. I´ve read you can get this kind of data directly from the C2 site but as I´m not here as a follower for now, I don´t know this way. I developed the described method for other copy trading sites where you can´t easily access correlation data.
Note: Then I don´t trade the real portfolio in that ratio because it would make the risk and performance too much dependent on the correlation. I determine ratios for the systems with a focus on risk control like I will show you in the next step. But still it´s good to select the least correlated systems so the performance is reasonably smooth.
Step 3: Control your portfolio risk right from the start - “client restrictions”
By reaching this point I have a good idea which systems I want to trade together. Then I determine how much of my portfolio value I´m willing to loose when any single one of the systems hits its MaxDD again. With that information I can calculate the ratio or scaling% I want to use for the system. Lets take another example with the same systems as mentioned above (set your own loss limit):
Portfolio value I´m willing to loose at MaxDD = 10%
ratio System 1: 10% / 40% = 0.25
ratio System 2: 10% / 20% = 0.5
ratio System 3: 10% / 10% = 1
Specific for C2:
To calculate the actual AutoTrade scaling% these ratios are applied after position sizes of the systems are adjusted for the difference/ratio of portfolio value to system value. Example:
Planned portfolio value = 100k
System 1 currently trades 50k -> AutoTrade = (100k/50k)*0.25 = 2 * 0.25 = 50% scaling
System 2 currently trades 20k -> AutoTrade = (100k/20k)*0.5 = 5 * 0.5 = 250% scaling
System 3 currently trades 100k -> AutoTrade = (100k/100k)*1 = 1 * 1 = 100% scaling
personal side condition:
I take for granted that no system will stay below a drawdown of 15% so even if the MaxDD is 10% like in the example system 3 I would use 15% for the calculation of scaling. So keeping that in mind I would acutally not use 100% scaling but (10%/15%) * (100k/100k) = 0.66*1 = 66% scaling
Step 4: Cut the loosing systems and re-enter if reasonable - system management
Now, if a system hits its MaxDD I loose 10% of my portfolio in the given example. That´s acceptable but I don´t want to stick with a system any further that starts to hit the hole. Therefore I stop trading a system that has broke through its historical maxDD. Many times it happens just because the worst drawdown hasn´t been in the track record yet but the system still works. So I re-enter the system if it made up 50% of the current MaxDD. This rule is based on my analysis of failing systems. Most of these unstable systems will not recover significantly when they start to erode. Unfortunately you can´t filter out all of them even with a decent strategy check. So by adhering to this rule I avoid to crash my portfolio with a single strategy that stopped working. In fact I maintain full control over my portfolio risk. When the positive scenario happens and the system recovers back to health I´m on board again half way up the drawdown. This leads to the situation that with the given paramaters I´d have a realized loss of around 5% when the strategy hits its recent equity peak again. So yes, in the positive scenario I´d be better off just holding on to the strategy BUT you never know if a strategy recovers. In the long run It´s smarter to stay out for some time so you can react on the further development.
If a strategy expands its MaxDD and recovers to a healthy status I recalculate the AutoTrade scaling by using the new MaxDD before I re-enter. That way potential loser strategies are automatically paused and scaled down while the winners are kept on their appropriate scaling. That´s just the same as “cut the losers and let the winners run” translated into copy trading.
I hope many of you find this article valuable and that you start to be consistently profitable soon.