We want to analyze the combined results of the individual strategies in the Stock Index Portfolio 18. All trading systems go through drawdowns and sideways trading periods. We have not discovered a strategy that is perfect. Strategies can be erroneously improved by using the optimization tool to curve fit a trading system that would establish an amazing historical backtest but would likely fail in real trading.
Using simple and imperfect trading systems, that only use a basic set of rules and without using optimization tools, provide a more stable framework for out of sample performance going forward for live trading.
Combining "imperfect" strategies into a portfolio can help improve our risk adjusted returns when using strategy combinations that have different entry and exit methodologies, a diversity of markets, and combining strategies at different cycles in their drawdown curve.
We still anticipate strategy and portfolio degradation. This is why we wait for a drawdown or losing streak to start and manage the risk in a portfolio while also monitoring each strategy to make adjustments. We are active traders and believe in actively managing portfolios based on market changes.
Even the most stable trading systems that have been carefully develop can endure a drawdown from the start. Even trading systems with live track records, can also endure a drawdown from the time a trader begins the strategy. Live strategies that have worked for 20 years can stop working.
Managing risk on a portfolio level is critical. Defining the risk for a cycle of trading is key. Limiting the risk during each cycle to a fraction of the total portfolio risk can allow us to minimize risk to endure the drawdowns, so that we are still well capitalized to take advantage of favorable market conditions.
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