Ideal Number of (Uncorrelated) Positions

A

aeliodon

I remember one of the market wizards making a comment about how foolish it is to have on too many correlated positions - which essentially acts as one huge position.

So for me the ideal number of positions is 3. I put all my money in my top three trading ideas/themes - such as: (1) short commodities (2) short bonds and (3) long equities.

I think by putting on any more positions is like stretching oneself too thin - it just makes it a lot harder to focus. Only if you're just scalping does having a lot of positions can make sense.

BTW I don't think anything is "uncorrelated" in the markets but you get the idea.
 
You have to fully understand the current state of intermarket relationships. Sometimes the positions of short bonds and long equities are very highly correlated.
 
Okay fuk it just fuk it.

Lets be honest now. There is no such thing as "uncorrelated" in the markets so forget the "diversification" myth - just make sure you know what the fuk you're doing before you put on a position and especially if its a leverage position.

But I still stand by my strategy of only investing in your top three trading ideas at a time.
 
Quote from aeliodon:

Okay fuk it just fuk it.

Lets be honest now. There is no such thing as "uncorrelated" in the markets so forget the "diversification" myth - just make sure you know what the fuk you're doing before you put on a position and especially if its a leverage position.

But I still stand by my strategy of only investing in your top three trading ideas at a time.
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From your point of view... there's no such thing as "correlated" then.

Remember... correlation is a relative measure.

Correlation between A and B is worthless as it is, unless there's C involved.
 
Quote from TSGannGalt:

Remember... correlation is a relative measure.

Correlation between A and B is worthless as it is, unless there's C involved.
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This is the thing that most amateur "pairs traders" miss.
 
Quote from aeliodon:

I remember one of the market wizards making a comment about how foolish it is to have on too many correlated positions - which essentially acts as one huge position.

So for me the ideal number of positions is 3. I put all my money in my top three trading ideas/themes - such as: (1) short commodities (2) short bonds and (3) long equities.

I think by putting on any more positions is like stretching oneself too thin - it just makes it a lot harder to focus. Only if you're just scalping does having a lot of positions can make sense.

BTW I don't think anything is "uncorrelated" in the markets but you get the idea.
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Correlation or uncorrelation isn't relevant in the context of what you are posting here.

Percentage risk to your portfolio is.

IOW, you determine the maximum number of positions/contracts based on the total damage which would be done to your equity base if all positions went against you at the same time and your stops were hit on every single position. Once that is done, you don't go past that percentage of your total equity when taking your positions.

Looking at the three categories that you have listed and your bias, that could easily happen.
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So for some people they think 5% of total portfolio is too risky, others go as high as 10% or 20%. It all depends on you, your timeframe, your risk tolerance, your ability to exit a position at your preset stop, and how your would react in the worse case scenario if your stop were blown but you were still in a position as the market moved against you.
 
IOW, you determine the maximum number of positions/contracts based on the total damage which would be done to your equity base if all positions went against you at the same time and your stops were hit on every single position. Once that is done, you don't go past that percentage of your total equity when taking your positions.
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I have made > 1,000,000 trades in 15 years...
And have never used a stop...
Because that means you are admitting you cannot manage a real-time portfolio...
And plan to pay high, additional fees when the market goes against you...
Compounding your losses.

If you have a professionally hedged portfolio...
It's basically impossible for "all positions to go against you at the same time".

I'm typically long about 60 stocks and short about 60 stocks and leveraged...
And my biggest drawdown in the last 5 years has been 3-4%.

You guys should learn how to build close-to-market-neutral portfolios...
Instead of operating under worst-case-scenario assumptions 100% of the time...
It's suboptimal to say the least.
 
Quote from DeeDeeTwo:

I have made > 1,000,000 trades in 15 years...
...
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nice! i have not counted mine, but that must be more trades that i have made :cool:
 
Quote from DeeDeeTwo:

I have made > 1,000,000 trades in 15 years...
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1 M/15 = 66666.666666666666666666666666667

Gee nice number!

66666.666666666666666666666666667/250 = 266.66666666666666666666666666667

gee! another nice number. Way to go! Assuming stock market:

266.66666666666666666666666666667/390 minutes = 0.68

or about 2 trades every 3 minues.

I know someone who does 33.3333 trades in 3 minutes.

Nothing special.
 
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