Portfolio Considerations of a Trading Strategy (Part 1)

My last two posts have addressed some issues one must clarify before implementing dollar cost averaging (DCA) as a CC/CSP management protocol.  Deleveraging is necessary for DCA and this moves us from considerations about the trading strategy to considerations about the portfolio.

Deleveraging is the availability of spare cash on the sidelines. Typically we think of a position as consisting of stock, options, or futures. Cash is a position, too.

A trading system includes a trading strategy along with guidelines regarding the management of multiple simultaneous positions (i.e. a trading/investment portfolio).  Deleveraging creates multiple simultaneous positions because the cash position sits in the account next to at last one CC/CSP position. The necessary guidelines address sizing of CC/CSP and cash positions. Many good sounding strategies are not viable for live trading because they lack these key portfolio considerations.

Unfortunately, most newsletter writers, trader education firms, and subscription services (i.e. commercial interests) want nothing to do with your portfolio [think liability].  Instead they often say “position size in accordance with your risk tolerance.”  Most people either don’t know their risk tolerance [until the worst happens when they realize their position size was too large] or don’t understand the consequences of trading small.   They learn about these details the hard way when sometime down the road they either lose more than they could have ever imagined or they don’t profit as much as they might have hoped.

Said another way, many people think they have found the next great “Holy Grail” of trading only to later discover it doesn’t work well in reality.  They have learned a good strategy but a poor system.

Is this misrepresentation or false advertising by the commercial interests? Is this optionScam.com?

In the SysCW archives, Rich MacDuff shows us hundreds of individual CC/CSP positions that all work out. The key question for a viable trading system is not only whether they work out but whether they can work together.