About 5 weeks ago I got a great trading lesson from my own hedge fund team.
I’ve spent years “training” these exceptional guys. Sharing as much of trading experience and knowledge as I could with them, but now they’re training me!
But before I share the story with you, and the important trading lesson in it, I have a small question for you.
Or, rather, let’s call it a small test:
Do you know what’s wrong with the equity curve of this Crude Oil trading strategy?
Ok, the answer is…
… ABSOLUTELY NOTHING!
So why am I sharing it with you?
Let me tell you.
My team and I are in the process of completing our second CTA investment program in our hedge fund.
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Months ago I gave my team very detailed and specific instructions on how to assemble the new CTA program and what it should look like. Based on these instructions, they selected the trading strategies and compiled them into several different portfolio candidates.
One of the portfolio candidates looked exceptionally good, so I started considering it as the final portfolio. But before that, I wanted to do a final check of the individual strategies in the portfolio first.
I started looking at each individual strategy until I stumbled upon the one I shared with you above.
I immediately didn’t like the character of the equity curve.
I asked my team if we had a “better” one (from the hundreds of highly robust breakout strategies in our database).
To my surprise, my team started defending this strategy.
They said it was the very BEST fit from the dozens of Crude Oil strategies we have in our database. I couldn’t believe it, so I started checking myself.
And my team was absolutely right!
We have MUCH better Crude Oil strategies when it comes to the quality and smoothness of the equity curve. But this strategy smoothed the portfolio equity the most, thanks to its low correlation with the rest of the portfolio!
So it reminded me of two very important things:
|1.||Always keep the bigger picture in your mind. Trading is like Lego – a lot of small pieces that need to fit together. Sometimes our personal biases need to step aside in the name of the “whole”. A standalone strategy can look a bit “weird”, but can do true MAGIC in a portfolio.|
|2.||If you want to build portfolios with exceptional results, you need to have A LOT of trading strategies to choose from. A few strategies are never enough. You need to aim for dozens of strategies at least. Hundreds if even better (and quite achievable if you know how!).|
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Happy trading and happy portfolio building!
Tomas & Andrew
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