Creating a Trading Portfolio

Look, when it comes to money management and trading, most (like 95%) of traders have no clue about what they're doing. Trading isn't really about winning and losing. Trading is all about the ratio of how much you make vs. the worst drawdown you can stand.

For example, I could make 1000% a year if I was willing to experience a 90% drawdown in my account. Could I stomach that? Not a chance. In fact, it's well known in money management circles that anything more than 10% starts getting clients bitchy…to the point where more than one person calls up and complains.

My personal penchant for risk is a 30% drawdown. What's yours? I have no idea. Only you can answer that. Not even a certified financial adviser can really answer that one (which is why I see very little use for one…but hey, that's just me).

People ask me all the time how much to put in this stock or that position. I can't answer that. For one, the US government does not allow it. It's illegal to give personal advice without a license. That's fine by me. I wouldn't know if you're part of the crowd that gets their feathers ruffled at 10% or if you're super aggressive and can take a 50% drawdown.

I believe the only way to really know is to actually start trading with real money. Start low, and then see what happens over the course of a year. Believe me, paper trading and real trading are completely different. It's easy to get discouraged after taking a big loss. “Big” is a relative term in this game though.

With that in mind, here's a sample portfolio using SP Slugger and Opportunity together. The results are hypothetical, but should give you an idea of the gains that could be made on a small portfolio (< $1 million). As a portfolio becomes large, it starts to affect the market…I know, what a problem to have 😉

SP Slugger with Opportunity Day Trader

The CAGR (reinvesting profits) of both systems combined is almost 200% a year. The maximum drawdown it took to make that much was 30%. That's over a 6:1 ratio which is almost unheard of over this much time (1997-2009).

In order to make these kind of gains, you MUST position size correctly. If you're an “all in” trader, you're going to lose. I've seen it several times: My SP Slugger system hits more than 10 wins in a row. A client puts everything into the next trade. He loses. He quits. Another gambler loses with an 85% winning strategy. Don't gamble your money away…you must keep hitting base hits instead of looking for homeruns.

If you read the descriptions for SP Slugger and Opportunity, you will notice that I provide exact percentages. That's a start. If you're very risk adverse, you might want to cut that amount to 1/3. Again, if you're looking for that homerun, you should just put your money in a money market account and walk away. Otherwise, you're just going to piss it away.

To sum up how to build a simple portfolio: you must first know what kind of risk you can handle. Usually, the older you are, the less you're willing to lose. If you're still jumping out of airplanes at 70, then you might be different from the masses.

Next, you must follow the money management suggestion I give and then apply that to your account. If you want to risk less, cut that number by 50% or more. If you want to risk a great deal, multiply it by 50%. If you can't sleep at night, or you find yourself checking quotes all the time, you're risking too much.

Hope that helps!