What Markets Should You Use for Your Portfolio?

A couple of years ago I made a fundamental mistake: until then I had my portfolio focused mostly on index futures markets. For years I have had with this approach really nice results. But that year, I experienced how frustrating it can be, to go through a couple of periods when index markets are underperforming. That was when I have decided to work really hard and improve my intraday portfolio composed of automated trading systems (ATS).

Smooth equity isn’t just about the systems – it is a smart combination of markets, timeframes, trading approaches, and, later on, also innovative position sizing. When you think about it, there is the logic behind it.

Even though in times of financial shocks and surprises there is barely any negative correlation in the markets, there are still some markets which live their own lives – and they offer us smart way for diversification.

The result is that when one of the market groups is not doing well, there is another, which compensates the losses from the first one – and makes the equity overall smoother.

What market groups you should use

This is the first question – what markets groups you should combine in order to get the desired result – smooth equity.

We have following futures groups: Index, Currencies, Metals, Energies, Bonds, and Grains. Every market group lives its own life and you can find at least one noticeable market in every group that can represent the whole group.

Personally, I have experimented with all groups and, besides currencies, I can highly recommend any combination. The currencies are, from ATS point of view, highly unstable (for example in Forex, ATS are failing really fast and it is really difficult to find profitable ATS for Forex). It also depends on how many markets you create a system for, and how many markets you trade with your account. But even with rather a small account, you can trade 3-4 markets. For such cases, I would recommend following combinations:

Combination of 3 markets (pick one market from each market group):

  • Index
  • Grains
  • Energies

Combination of 4 markets (pick one market from each market group):

  • Index
  • Grains
  • Energies
  • Bonds

Nowadays, I trade several portfolios that are based on the 4 groups mentioned above. Here is an example of one of them (breakout strategies, 30-minute chart, 5 markets, equity for the last 8 years, trading 1 contract per system):

The net profit for all 8 years and all markets combined is 421,548 USD and the max drawdown is just 12,315 USD.

Smoothen the equity by using multiple timeframes

The second way how to smoothen your equity curve (in a combination of trading several markets from different groups) is using several timeframes for every market (ideally without changing system parameters, or with just small changes).

It is more like a final touch than smoothing the equity, but it brings up an interesting idea that it might be better to add new timeframes instead of trading multiple contracts in the same timeframe. Another option is to optimize also the timeframes (check the results of your system on several timeframes and pick one timeframe for each market – it can, but doesn’t have to be the same) – but then, we need to ask ourselves how much of over-optimization this is.

Anyway, here is another example of the portfolio mentioned above, when for every market we add the second, 15-minute, timeframe. The equity is slightly smoother, the drawdown hasn’t increased so much, but the profit has.

The net profit is 812,457 USD and the drawdown is 18,815 USD.

What systems to use

The best variant is to have in a portfolio both trend and also counter-trend systems. Still, it is sufficient to have a system that can smartly react on both situations (equally, if possible).

I am specialized in breakout strategies and I can say that it is all you need to have a balanced portfolio across several markets – but only if you have systems trading both long and short. Sometimes you just need a simple breakout strategy that doesn’t have great performance (that you wouldn’t trade individually), but in combination, you have a nice portfolio with smooth equity curve. You need to constantly focus on the performance of the portfolio – it is more important than the performance of underlying systems. Remember when there is a huge drawdown for one market (system), the others can compensate that and you can still make a profit.

For that, you need to have a quality workflow setup how to create new and new strategies, as you will need a lot of them and for several markets. At the same time, it is crucial to have a setup of robustness testing procedures so that we can add to our portfolio really robust strategies.