Trading Falsehood 156

"Portfolio trading just means trading
a variety of different commodities."

No, that is quite wrong. Don't get mixed up with stock portfolios and the idea that the commodities you trade are like a bunch of stocks you have bought.

In commodity trading, portfolio trading refers to the method used to test your systems.

What's so special about portfolio trading?

The best way to describe portfolio trading is by considering what happens in your routine daily live trading.

Any time after the markets close and before they open again, you will record any orders executed by your broker 'today'. Following this, your system will run through the list of commodities you have selected for trading, to see if any new buy or sell signals have arisen.

This involves looking at your current position regarding each commodity in conjunction with your system rules and 'today's' market prices. (Your system does this for you automatically as soon as it receives the most recent prices.)

As a result, you will send any new orders plus your exit orders, to your broker before the markets reopen.

The size of positions to be taken is calculated in accordance with your open positions and equity balance as they stand today. From time to time, resources will become fully committed and when this happens, your system will refuse further trades until the situation changes.

Of course, this is just a brief overview of the routine daily procedure - but, as can be seen - all the commodities are an inseparable group and must be traded together (on a daily basis) in order to establish account balances for position sizing.

This is what is known as portfolio trading. Exactly the same portfolio trading methods are vital in system testing.

A trader wishing to evaluate a system will want to run tests to assess its capabilities. Typically, a 5 year period is chosen.

A 5 year period is about 1250 trading days - all to be tested under simulated live conditions. So the test will have to trade each of these days, starting on day 1 and running through each subsequent individual day in sequence.

Firstly, any positions to be closed are dealt with and new equity balances are calculated before deciding what new trades can be taken.

Many other detailed tasks must be attended to as well, such as contract rollover, price slippage and all other work involved with trade management.

The whole process is called portfolio trading and in this case is conducted from day 1 to day 1250 of the test period.

Knowing the procedure necessary, the demands made on the trader's software from an expertise and efficiency point of view can be much better appreciated.

A typical 'step testing' run is quite likely to involve hundreds or even thousands of full period length tests to produce the necessary results.

A 1000 run test over the 5 year period is the equivalent of 5000 trading years, all needing to be simulated on an individual daily basis.

After setting the scope of the test, a professional trader would expect all this work to be done automatically in a few minutes - say the time he would take to drink a cup of coffee.

Why is portfolio trading so important?

The capabilities of a system can only be assessed if it is evaluated in a portfolio traded environment, under simulated live trading conditions.

It is not more difficult to test in this manner - all that are needed are the right methods and software. Then, all of the rest will follow automatically.

Portfolio trading means much more than trading a variety of different
commodities.

 

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Copyright David Bromley 2006
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