TRADETHINK ARTICLES : Why a Multi Market Portfolio is Key to Success

October 9, 2009

Why a Multi Market Portfolio is Key to Success

By Chris Morse

Not all markets trend at the same time. The average market is trending about one third of the time. The other two thirds of the time the market will be choppy or stagnant. So it makes sense to track multiple markets for more consistent returns and a smoother equity curve. The is no way of knowing in advance whether a particular market will be trending today, tomorrow, next week or next month. Fortunately there is a way to capture trends more consistently by following a portfolio or suite of diversified markets.

How do we know which markets to trade? Good thing about commodities is that there are several major non-correlated market sectors. We have available to us as market tacticians; metals (gold, silver, copper, platinum and palladium), meats (feeder cattle, lean hogs, live cattle and pork bellies), grains (corn, wheat, soybeans), currencies (Euro, British pound, Swiss franc and Japanese Yen), softs (sugar, cotton, coffee) interest rates (two year notes, five year notes, ten year notes and thirty year bonds), fuels (crude oil, gas oil and natural gas). All of these markets can produce excellent trading opportunities. When they are traded together you get the diversification required for more consistent returns.

When creating a portfolio of markets to follow the key is to select at least four or five market sectors (the more the merrier) and at least two or three markets per sector to build a well diversified portfolio to track ten to twenty markets or more. By tracking multiple markets simultaneously we open ourselves up to the possibility of more trading opportunities. Some market sectors will be trending while other market sectors are not (remember that not everything trends at the same time). If you want to be consistent in making money you will need to focus on market trends as they come to you. Regardless of whether the next big trend comes in the grains, fuels, currencies the metals or some other market sector one must be in position to catch the move. A successful trader is not biased to one market over another. If a market makes money that is all that should count in the end.

It takes precision and discipline to follow a diversified portfolio of commodities markets. You will want to have a systematic approach to know which markets are starting to trend. Markets will make some type of breakout when they start to move. To capture the breakout you will need to have your entry orders set up in advance as buy stops (for long trade entries) or sell stops (for short trade entries). Once you are in a trade it is paramount to have a worst-case money management stop in place just in case the trade fails to follow through. Once a trade starts moving in your favor it is critical to set daily stops, but not too tight as you will need to give the trade room to breathe and mature. The daily setting of stops is a key factor, for when a market reverses or pulls back you will want to close out the trade and take your profits off the table. To get a complimentary trial to the trading system I developed go here.

Here are just a few trades that are moving across different market sectors; interest rates, meats, metals and currencies.


Ten Year Notes

My trading strategy (Think Pro) called to enter the December Ten Year Notes long on 9/30/2009 at 118.52. The notes have started to move up and closed at 119.72 on 10/7/2009. We have a profit of $1,200 per contract. Our protective stop is at 118.6.

Feeder Cattle

My trading strategy (Think Pro) called to enter the October Feeder Cattle short on 9/17/2009 at 97.05. The Feeder Cattle have started to move lower and closed at 93.18 on 10/7/2009. We have a profit of $1,935 per contract. Our protective stop is at 95.02 to lock in profits.

Gold

My trading strategy (Think Pro) called to enter the December Gold long on 9/2/2009 at 964.60. The Gold has started to move higher and closed at 1044.40 on 10/7/2009. We have a profit of $7,980 per contract. Our protective stop is currently at 1013.40 to lock in profits.

Japanese Yen

My trading strategy (Think Pro) called to enter the December Japanese Yen long on 8/27/2009 at 107.14. The Yen has been moving higher and closed at 112.88 on 10/7/2009. We have a profit of $7,175 per contract. Our protective stop is currently at 110.31 to lock in profits.

As you can see from the above charts there is movement in markets across several broad and diversified market sectors. If you really want to be successful in trading you should consider an approach to the markets that will consistently identify trends and get you into the trades with diversification and risk management. Go here to get started with a complimentary trial of TradeThink.

Trading signals and charts are courtesy of TradeThink, Inc.

About the Author

Chris Morse is the Developer of the TradeThink trading system. He has been involved in the development of trading strategies for nearly ten years. Mr. Morse developed a very robust system which is now in private use at one of the largest FCM's and has earned sizable returns for the last 3 years. Mr. Morse now focuses his time exclusively on developing and managing his systems.

Disclosure: Commodity trading has large potential rewards, but also large potential risks. You must be aware of the risks and be willing to accept them in order to invest in the futures markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to buy/sell commodity interests.

Notice: Returns are hypothetical. Hypothetical or simulated performance returns have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since trades have not actually been executed, the results may have under or over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight, no representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. INVESTMENTS IN FUTURES INVOLVES HIGH RISKS AND YOU CAN LOSE A LOT OF MONEY.

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