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Managing a Trading Portfolio

Managing a trading portfolio starts with measuring and controlling trading risk. There are quite a few tools that can help traders to measure and control their risk. However, before presenting a number of significant portfolio management ratios, it is useful to mention three fundamental investment concepts for managing any portfolio:

• Risk-Free Rate

The 'Risk-Free Rate' is the annual return that an investor can secure without taking any market risk. It is usually determined by the 3-month treasury bill.

• Standard Deviation (SD)

A standard deviation is a statistical tool that estimates the amount of variation in a set of values.

• MaxDrawdown

'MaxDrawdown' calculates the maximum historical loss of a trading portfolio compared to its maximum dollar value.

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Combining Technical Analysis with Fundamental Analysis

‘If fundamentals create the brains of the Market, technicals create a spirit and a soul’

Fundamental analysis studies the cause of a market movement while technical analysis studies the effect. These two major methods of analysis are used in order to explain the behavior of any financial market, but also in order to forecast future market conditions.

There are three general approaches when trading any financial market:

1. the technical approach
2. the fundamental approach
3. the combination of technicals and fundamentals

As Warren Buffett said: “Price is what you pay and value is what you get”.

A fundamentalist will focus on the real value, while a technician will focus on the price movement. A wise analyst will always focus on both.

(1) Fundamental Analysis

“Nowadays people know the price of everything and the value of nothing.” -Oscar Wilde, The Picture of Dorian Gray

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Automated and Algorithmic Trading Tutorial

The Foreign Exchange is a fully-decentralized market where international currencies are traded over-the-counter. As there is no specific center that controls the raw of currency transactions, there is no single exchange rate for every pair. Nonetheless, due to currency arbitrage, exchange rates tend to trade very close to one another. Moreover, the Foreign Exchange market is extremely liquid with daily volumes exceeding 4 trillion US dollars. This combination of a decentralized market structure and enormous liquidity creates the perfect environment for the development of automated trading systems.

Automated and Systematic Trading

Automated trading refers to the process of trading the global financial markets without any human intervention. Automated trading is a branch of systematic trading and consequently, all automated trading systems are systematic systems.  Systematic trading assumes:

1. A rules-driven trading strategy that is based on objectively computable inputs
2. The implementation of the strategy by eliminating the human emotional factor

General Categories of Automated Trading

According to Mitra, di Bartolomeo, and Banerjee (2011), automated trading can be classified into five main categories:

(i) Algorithmic Executions (The category that interests us the most)

(ii) Statistical Arbitrage (Exploiting trade opportunities deriving from market inefficiencies)

(iii) Predatory Trading (The practice of entering thousands of orders while expecting to execute only a tiny fraction of them)

(iv) Crossing Transactions (transacting with another entity without exposing the orders to other market participants)

(v) Electronic Liquidity Provision

How Automated Trading Differs from Algorithmic Trading?

Automated trading is almost considered synonymous with algorithmic trading, however, there is a difference in how these two methods approach the market. Automated trading refers to the automation of everyday manual trading processes. Automated trading usually focuses on the prediction of asset price movement based on a recognizable price trend, macroeconomic indications, news releases, and many other events.

On the other hand, algorithmic trading refers to the research and analysis of market conditions and trading data in order to develop efficient instructions and rules. It includes a wide variety of parameters such as price, time, and volume.

The two different approaches, at a glance:

• Automated trading focuses on the automation of the trading processes and especially as concerns execution
• Algorithmic trading focuses on the automation of trading research and analysis by incorporating an execution module

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Four (4) Methods for Identifying and Following the Master Price Trend

‘The trend is your friend, learn to recognize and to follow your friend’

In this analysis, we are going to investigate 4 different methods for identifying the master trend in a price chart. But first of all, we are going to refer to the 3 different market phases and then how to apply the appropriate timeframes.

The 3 Different Market Phases

There are three basic market phases, common for all Financial Markets:

(a) Consolidation Period (The markets move sideways within a certain Range or else a Price Channel)

(b) Going Up/Uptrend

(c) Going Down/Downtrend

The 3 phases can also be described as:

(i) Consolidating Period (ranging)

(ii) Trending (up or down)

(iii) Trend Reversing (up or down)

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Master Trend and Timeframes

There is a master trend for almost every timeframe you trade. Most probably, this trend will not be visible directly in the timeframe you trade. You need to search for the master trend 2 timeframes above your entry chart (MetaTrader). For example:

• Trading the M5 chart → use the M30/H1 charts for identifying the trend
• Trading the H1 chart → use the H4/D1 charts for identifying the trend
• Trading the D1 chart → use the W1/M1 charts for identifying the trend

The Essence of Top-Down Researching

The wise way to analyze any market trend is to start at the highest timeframe by going down (Top-Down Analysis). This approach will provide you with a wide understanding of the current market conditions and the true market depth.

Therefore, if your execution timeframe is H1, start researching the D1 and then the H4 timeframe to identify any trends and opportunities. The execution timeframe H1 will be useful in determining the ideal time to enter the market. Avoid starting your analysis on the lowest timeframe by going up (Bottom-Up Analysis).

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