How I Allocate My Capital And How Commissions Grab My Gross Profits (Portfolio Management)

I have received some e-mails about how I allocate my capital. I admit that this is a problem and quite a difficult task. Sometimes I have no positions, suddenly all my signals trigger and the allocation becomes a problem.

My aim is to trade different stocks that correlate as little as possible. Of course, that is not easy, because in down markets most seem to correlate.

However, I think I have “solved” this by concentrating more on pairs trading. So what I do is simply use 100% of my equity on pairs. The rest of the directional trades I do is on margin.

I have a portfolio margin account at Interactive Brokers, so I can put on quite a margin.  I have done this for a few months and it has worked quite well so far. Actually, much better than I anticipated. I’m up about 7% since then with about 500 trades. Most of my pairs are only held 1-3 days. I’m very pleased with the result considering I’m about 40% short in a rising market. Short is actually profitable in this period, albeit not much.

By the way, here are some other “facts”:

1. Live trading results are about 1/3 less than in theory.
2. Commissions take away 1/3 compared with my gross profits. I pay the “real” costs at IB, not the fixed commission rate. I’m gonna deposit more money to trade more size and this will lower my commission rate.

Relevant reading:

• What is slippage in live trading? Examples from real trading

 FAQ:

– What is the strategy for achieving low correlation in your trades?

To minimize correlation, the trader focuses on pairs trading. This strategy involves allocating 100% of equity to pairs, and the remaining directional trades are done on margin.

– What are some key considerations when implementing this approach?

It’s essential to consider that live trading results may be approximately 1/3 less than what is expected in theory. Commissions can also have a significant impact, accounting for around 1/3 of gross profits. The commission rate can be lowered by depositing more capital.

– How do commissions impact trading results, and how do you plan to address this issue?

Commissions reduce the overall profitability of the strategy. The trader pays “real” costs based on the structure at Interactive Brokers (IB). To mitigate this, the plan is to deposit more capital to increase trading size and subsequently lower the commission rate.