The Power of Quantified Trading Portfolios: A Guide for Beginners

As a beginner trader, you may have heard that only a small percentage of traders can make consistent profits in the long term. The truth is, finding one perfect trading strategy is almost impossible. However, there is a solution: trading portfolios consisting of multiple quantified trading strategies

Why Building a Portfolio is Crucial

Most beginners make the mistake of searching for a holy grail in trading – a perfect strategy that works in all market conditions. Unfortunately, such a strategy doesn’t exist. Market dynamics constantly change, and it’s impossible for one strategy to perform consistently well in all market conditions. Moreover, many beginners try to get rich quick by trading with too much risk, leading to significant losses.

Trading portfolios consisting of multiple quantified strategies are a solution to these problems. Portfolios allow traders to trade a diverse range of strategies that complement each other, minimizing risk and increasing profit potential. Let’s explore how to build a portfolio of quantified trading strategies step by step.

Step 1: Developing Profitable Strategies

The first step is to develop profitable trading strategies. Each strategy should be properly developed, backtested, and validated to ensure it’s profitable. This can take some time, but it’s a crucial step in building a successful portfolio. Some examples of trading strategies include:

• Momentum trading: This strategy aims to profit from trends in the market by buying assets that have been going up and selling those that have been going down.
• Mean-reversion trading: This strategy aims to profit from the tendency of assets to return to their average price after deviating from it.
• Rotational trading: This strategy involves buying the best-performing assets in a particular sector or industry and selling the worst performers.
• Breakout trading: This strategy aims to profit from assets that break out of a price range or resistance level.

Step 2: Ensuring Uncorrelated Profits

The next step is to ensure that each strategy generates uncorrelated profits. This means that each strategy should have a unique edge and make profits in different market conditions. For example, a momentum strategy may perform well in a trending market, while a mean-reversion strategy may perform well in a range-bound market. By combining different strategies with uncorrelated profits, you can reduce the risk of a single strategy underperforming and dragging down the entire portfolio.

Step 3: Diversifying Strategies

The next step is to diversify your portfolio with a range of strategies that work in different asset classes, trading frequencies, styles, and directions. This diversification helps to minimize risk and maximize profit potential. Some examples of diversification include:

• Asset class: Trade a variety of assets such as stocks, ETFs, futures, options, and crypto to avoid overexposure to a single asset class.
• Trading frequency: Include long-term, swing, intraday, and overnight strategies to take advantage of different time frames.
• Trading styles: Include momentum, mean-reversion, rotational, and breakout strategies to take advantage of different trading styles.
• Directions: Include both long and short strategies to take advantage of market movements in either direction.

Pros and Cons of Trading Portfolios

Trading portfolios offer several advantages over a single trading strategy, including:

• Lower drawdowns and greater gains over the long term.
• More consistent gains and less time spent in a drawdown.
• Increased error-proofing due to the diversified nature of the portfolio.

However, there are also some cons to consider:

• A steep learning curve in developing multiple working strategies.
• The need for a bigger trading account to accommodate multiple strategies.

Conclusion

Building a portfolio of quantified trading strategies can be an effective way for beginners to maximize profits and minimize risk. In this series I will try to guide you through creating your first portfolio. I will give you ideas on strategies you can create and we will check how joining few simple strategies into portfolio will boost its performance.