Portfolio Trading & Testing

Portfolio Trading

While some traders prefer to make a living trading a single stock like KLAC or an e-mini such as ES, most traders seek to increase their returns and reduce their account variability by applies their strategies to baskets of commodities or equities (or even the whole universe of equities!). Applying a single strategy to a group of commodities, currencies, or stocks is called “portfolio trading.” Market Testing Wizards will model and backtest your strategy in the trading universe of your choice.

Challenges in Backtesting Portfolios

Because your strategy needs to be applied to a group of equities, commodities, or currencies, portfolio testing presents some unique challenges. The system designer must determine the maximum number of positions, how much capital to allocate to each position, rank potential trades in case there are more opportunities than capital, and, of course, define the universe to be traded. Our portfolio testing framework enables us to accurately model and backtest your strategy and merge it with the appropriate portfolio methodologies.

Backtesting Portfolio Systems using Limit Orders

Limit order present yet another challenge when backtesting portfolios with end-of-day data. Some traders will want to place more limit orders in the market than they have capital for and then cancel the extra orders once the available capital is allocated. Or others may want to place orders in the market during the day as prices near their targets. Both of these scenarios are impossible to model precisely since with end-of-day data you do not know which orders would have triggered first. Usually Monte Carlo simulations are the best solutions for these scenarios. We also offer a simpler best case/worst case test to give system designers a quick idea of the operating space. And, a third option is to use our Portfolio Limit Object Module which allows us to model placing only a fixed number of limit orders in the market according to your ranking system. This eliminates the problem of having a range of possible results and allows you to trade a system without watching your screen all day!