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”:
- Live trading results are about 1/3 less than in theory.
- 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.