Our strategy is built from generating classes of assets and tailoring the tactics per class.
The criteria for classification:
1. Trading speed: position [slow, expected to hold for months], swing-trading [mid-speed, daily oversight required] , day-trading [highly risky, should be checked every 30 min or so]
2. Risk level: leverage, beta of the underlying asset, defensive/aggressive
3. Diversity: US equity, forex/inflation, commodity, bonds, REIT
4. Location: US, China/India/Russia/Japan, Developed/emerging country
5. Breadth: single stock, sector/industry, large index
6. Level of management: stock, ETF over asset class, strategy/rule based, close end fund
The main guiding principles to the strategy:
1. Large wins, small wins and small losses are OK. Huge losses (drawdown > 20%) should be avoided
2. Need to reduce correlation of investments on time scale, management scale, inflation
3. Too many assets cannot be controlled effectively and do not reduce risk any more. Should consider alternatives for every allocation
Reasonable allocation:
1. ~15 individual stocks, selected based on great behavior over time, specific arbitrage opportunity or sector presence
2. ~6 highly volatile assets selected from leveraged funds of indexes, sectors, fear, commodity, international
3. ~6 alternative assets such as leveraged bonds, REIT, MLP, forex etc
4. ~15 additional ETFs based on specific sectors and strategies
Guiding principles for allocation:
1. It is really hard to monitor above 50 asset, even at various speeds.
2. There is no real diversity below 20 assets.
3. Investment below 2K$ does not really enable frequent trading.