Once you have built a portfolio, you will need to set up some rules as to how to maintain it.
SystemTraderFX should be thought of as an investment that you do not necessarily want to modify every few days.
You want to avoid a reactionary response to negative returns that you may see on your portfolio. After all, if you are trading a trend based system, it is only natural that it will have draw downs while the market is moving sideways (and vice versa).
A proactive approach would be to only make small changes to your portfolio that are not necessarily influenced by the system’s recent performance.
System Cut Off Point
Typically it is recommended that you do not modify your system by adding your own stops and limits.
These actions will inevitably change the system’s performance and nullify what you have spent so much time back testing. Nevertheless, systems typically do have a life cycle, where after a period of time they become ineffective and obsolete.
To prevent yourself from becoming a victim of this, some traders will put manual stops that are 2 or 3x the historical maximum draw down. This protects them in the event of a worse case scenario failure of the
system.
Portfolio Reevaluation
Before you go live with your portfolio, you may want to commit to a reevaluation calendar.
While you do not want to tamper with your system too much, it is a good idea to reevaluate it once a month or once a quarter. Markets go through trending and consolidating phases, and you will want to take this into account by making sure that you have systems that are best able to take advantage of the move.
For example, if you anticipate that for the first quarter of the year the UK will be in a tightening cycle, you may want to choose trending GBP system that is best able to take advantage of these moves.
If you think that the interest rates will be held steady for an extended period of time, you could opt to refocus the portfolio on the range bound systems.
You can easily form an opinion of the markets by visiting the Online Trading Classrooms by Trading Post Brokerage or the currency rooms on DailyFX.
Taking Profits
At a certain point, you will want to withdraw profits from a profitable system. This is after all the motivation for investing.
Before you do so however you will want to consider the impact that such a withdrawal will have on your portfolio.
Whenever you withdraw funds you should consider two things:
- Overleveraging
Withdrawing funds can lead to overleveraging an existing portfolio. For example, imagine that you have a starting balance of $5,000 and are trading 10K fixed lots on two systems that specify 4 maximum positions. This would put your exposure at 80K. Therefore your leverage would be 16:1 (80,000/5,000). By withdrawing just $1000 from your account, you would be raising your leverage to 20:1 (80,000/4,000). - Consecutive Losing Trades
Now imagine that you were merely withdrawing profits from your account. You have a balance of $5,000 and are trading a system with a 50% win record. Let’s imagine that in your first week of trading, you have 20 consecutive winning trades that yield a profit of $2,000. You decide to withdraw these profits, which will put you back at your starting balance of $5,000.On the surface you would not think that you are putting your account at any greater risk than when you started. However, because your system had a 50% win record, you might be putting yourself at risk for 20 consecutive losing trades to follow!
20 losing trades could cause an equivalent loss of $2,000, which would reduce your balance to $3,000. A $3,000 balance on 80K of exposure would result in a highly overleveraged account 26:1. This could ultimately put you at risk for a margin call. In other words, avoid withdrawing profits after experiencing a brief winning streak.
