How to decide which system to use each day in your portfolio?

If you’ve got different trading systems in a portfolio and some of them are making and losing money at the same time, which one do you use? The answer lies in the fact that you don’t know which one will make money tomorrow. If you’ve got a trading system in your portfolio, you need to have the confidence that each of those trading systems will make money or build your wealth over time. You won’t know which trading system will make or lose money. However, if all of them will make money over time, they’re going to have some volatility, then they’ve earned a place in your portfolio. I allocate some capital to each trading system and follow it all so the equity curves will smooth each other out.

You can have different kinds of trading systems for different market conditions. Having a long side trend following system which makes money in a bull market because sideways has a bit of a drawdown in a bear market. A mean reversion system that makes money whenever the market dips and recovers. A short side system that makes money whenever the market collapses. Making money under different market conditions is the trick to becoming more consistent in your portfolio, not just having one approach. I backtest them all and build confidence in them.

Each trading system may also have an on and off switch. For instance, with a trend following system, you may choose to turn it off if the index is going down if the broader market is going down. A market regime filter, or an index switch, might turn off and go to cash. It might just turn off and stop taking new positions but hold existing positions. So the system could turn itself off, but then you keep scanning that system to see if it’s turned on again and run and generate new signals.

Diversification is the key because no one sets the rules, there is no indicator, and no system will make money all the time. We need to have different strategies for different types of markets and combine them all and follow them to improve our portfolio.

Since I trade Australia, Hong Kong, and the US, I trade long and short. I trade long and short term, in the middle in which those different strategies turn out okay. Sometimes one system loses money, another system makes money, and sometimes all the different systems make money. It evens itself out, and they all help smooth the portfolio.