Portfolio Considerations of a Trading Strategy (Part 4)

In my last post, public discussion among traders was identified as another venue where portfolio considerations are overlooked. Such discussion carries the guise of being helpful but since live trading without portfolio consideration amounts to gambling, this really is not helpful at all (think optionScam.com).

Put a different way, managing a “small” position makes it easy for me to act brave because [by definition] a negligible percentage of the portfolio is at risk. Adjusting a position often increases the margin requirement somewhat but with a small position I can adjust repeatedly while continuing to maintain negligible loss potential. I can basically adjust as many times as necessary for it to work out profitably in the end.

As discussed in the recent mini-series on Martingale betting systems, for all intents and purposes “small positions” are but a fiction. Most Blackjack tables in Vegas do have maximum betting limits, after all. Furthermore, how many people can tolerate aiming to make $5 while being down many orders of magnitude more? This is a losing business plan because eventually I will encounter a losing streak extreme enough to bankrupt my entire account.

Full disclosure of position size includes percentage of total net worth, which is not something Western culture sees fit to share with others. This statistic is a vital piece of information, however, because it may be the key determinant of whether an individual trader chooses to maintain a position or to bail with catastrophic loss in the midst of severe drawdown.

Not having these discussions with other traders leaves us to make the “should I stay or should I go” decision without any outside assistance. And why is it repeated that 70-90% of all traders fail within the first 1-3 years? The first time we encounter this harrowing decision might be the last.

My next post will offer a complete illustration of where portfolio considerations may enter the fray.