With SystemTraderFX, you can add multiple systems to your portfolio.

While this can increase your potential profits, it can also increase your potential losses at any given time.

However, if you create a balanced portfolio you can potentially limit such losses in your account.

For example, if you have 3 systems that are moving against you at the same time, you will most likely get frustrated with your portfolio.

If however you have one system that is in your favor, one that is moving against you and the other that is flat, you will probably be more comfortable with the overall performance.

In this section you will learn how to best balance a portfolio.

Correlations

Once you have narrowed your list down to a select few systems that you are comfortable with, you will then need to verify that none of the systems in your final portfolio have similar strategies.

The first step will be to split your list into two groups: systems that are trend following and systems that are range bound.

The easiest way to acquire this information is to select the “System Performance” link under the “Support” menu at the top of this page.

If you click on the “Performance” link, you will be presented with a list of all the available system on SystemTraderFX.

Clicking on the “Info” button will provide you with information that the provider is willing to disclose including: pairs, average stop/limit, average profit, the frequency of trades, and most importantly the underlying strategy.

Another way to get an idea of when the system performed best is by simply pulling up a graph of the system. You can do this by clicking on the “Curve” icon.

If a system performed well in August 2007, you can then pull up a graph to see what the price action was like during that time.

For example, the following GBPJPY system had very impressive gains in August of 2007. Please keep in mind that past performance is not indicative of future results.

If you pull up a graph you will see that the GBPJPY sold off dramatically falling nearly 5,000 pips in one week during this time frame. So it may be safe to say that this particular GBPJPY system does well in trending and/or volatile conditions.

While you may want to include this system in your portfolio, it would be a good idea to match it with another system that has historically done well during range bound market conditions.

What you definitely want to avoid is having two systems with a similar premise on the same currency pair.

For example, adding two GBPJPY trending systems may lead to substantial profits, but it could also lead to large losses.

Once you have grouped your systems, you should then eliminate currency pair duplicates.

For example, if you have two trending systems on the EURUSD, simply pick the better one. You should also take into account the correlations between currency pairs.

DailyFX.com offers a weekly report on currency correlations that you can read. As you can see below, the EURUSD has a very high negative correlation with the USDCHF.

Therefore, adding two trending pairs on the EURUSD and the USDCHF would be similar to putting all of your eggs in one basket.

Account Breakdown

Selecting the systems in your portfolio is only half the battle. You must also consider the account breakdown.

If you are starting with a modest balance, you will only want to allocate the minimum to each system. If however you have room to allocate more than 10K per system, you may want to consider a pyramid strategy.

The knee jerk reaction is usually to allocate most of your resources to the best performing system to maximize profits. However, often the best performing systems also come with larger draw downs.

To create a balanced portfolio you will actually want to allocate the better part of your system to the lower risk systems, and a small portion of your account to the higher risk systems.

This pyramid strategy for your account breakdown is typically a good method for capital preservation.

1. The first step is to rank all of your systems by their maximum drawdown so that you can
   evaluate the risk.
2. Then you will determine your account size and the maximum draw down you will be willing
   to accept per system in dollar and percentage terms.
3. You can then divide the maximum dollar loss that you are willing to take by the max pip
   draw down to obtain your ideal position size per system.

For example, imagine that you have a starting balance of $50,000 and are only willing to take a 5% draw down on one of the more volatile systems; the max dollar draw down would be set at $2,500.

Now assume that the maximum draw down on this system has been 300 pips.

This would put your maximum position size at 8 10K lots (80K) (2,500/300).

Keep in mind however that the system already specifies the maximum positions that it will open at any given time. To calculate the final position size you will need to divide the number you derived from the formula by the maximum amount of positions that your system can take on.

For example, if the system allows a maximum of 4 positions at a time, you will then put in 2 mini lots (20K) for this high volatility system (8/4) = 2.