If you haven't already done so, it's time to start working on your 2010 trading plan. I have been working on mine over the last week. I was quite happy with my 2009 plan, but changes in margin requirements for the double leveraged ETFs have forced me to change that approach, which is probably a good thing because although the plan has worked well overall, it has suffered due to too much concentration which has lead to excessive portfolio volatility. My goal in 2010 is to increase return and reduce volatility. I am measuring volatility using month to month returns. The goal here is to get the standard deviation of monthly returns to be less than 4% to 6%. Studies have shown that the expected maximum drawdown can be estimated by multiplying the standard deviation of monthly returns by 5. So the above target would produce a theoretical maximum drawdown of 20% to 30%. If I can do better, then great.
I have found that although some advisors, like Investor's Business Daily, recommend trading only a few positions, that trading more positions using multiple systems reduces volatility. And I like the challenge of managing more positions, so it is a win/win.
I am going to divide my portfolio into 6 groups: Core, Majors I, Majors II, Stocks I, Stocks II and Commodities. The Core group will consist of 6 SPDR sector ETFs. I will trade these using the Swenlin Trend Model found at Decisionpoint. The method is explained under the Learning section. I expect that trading will be infrequent and occasionally go into a neutral stance, which should reduce risk exposure. The Majors I group will consist of 2 major index ETFs. I will trade one using the MACD as demontrated in the System Tracker, and the other using IBD's market calls. Again the trading in this group will be relatively infrequent although there has been alot of action with IBD this year. The Majors II group will consist of 2 major index ETFs. I will trade this group using short term methods including fading the trend when appropriate. The Stocks I group will consist of 4 stocks that I will trade using intermediate and long term methods. The Stocks II group will consist of 4 stocks that I will trade using short term methods. The Commodities group will consist of 3 positions in gold, oil, and one other commodity or commodity index. I will trade gold using the fractal trading method as described in the book Trading Chaos by Bill Williams. I will trade oil using Monthly trade triangles as used by Market Club.
The total maximum number of positions is 21. This may seem like of lot to keep up with, but only 3 of the groups and 8 positions will require short term management. This plan gives me diversity of markets, diversity of methods, and diversity of time frames. We will see how it works out.