I have heard about strategies that invest with multiple trend following funds and allocate capital between them inverse to performance. These strategies will pull money out of funds that have performed well over a period of time and reallocate that money to funds that have underperformed during that time.
The idea behind this type of strategy is that trend followers that have been performing well are due for a correction and funds that have been performing poorly are likely to be coming out of a correction. This allows an investor to have a larger portion of capital invested when a fund logs its biggest gains.
A recent post from Dorsey Write Money Management explored a similar concept that allows traders to double down on their own strategy. The post covers an article by Craig Israelsen that that suggests contributing additional funds to your account after losing periods to maintain a minimum overall return.
How Israelsen’s Strategy Works
What Israelsen proposes is geared towards long term investors. He suggests choosing a benchmark number like 8% that an investor will target as an annual return.
During any years where an investor falls short of the 8% Rückkehr, they should contribute enough funds to make up the difference. Jedoch, if the account returns more than 8% they are not obligated to contribute anything further.
This type of strategy will create a smooth equity curve that always moves higher. It takes advantage of the power of dollar cost averaging on the downside, and then lets the upside take care of itself.
Applying The Strategy To Forex
While this strategy is interesting in theory, most Forex traders don’t think in terms of annual return. They are looking to book profits on a daily basis. How could we adjust the strategy to fit that model?
The simple answer would be to set a daily benchmark for the return instead of using an annual return. If your goal is to make a certain amount of money everyday, force yourself to contribute the difference if you come up short.
This would ensure a consistently positive equity curve, so the account value would never erode. Jedoch, there are also some drawbacks to this strategy.
Problems with the Strategy
The most obvious issue with this type of strategy is that it assumes that you can afford to contribute enough capital on a regular basis to make up for any losses incurred by your trading. If, at any point, you are unable to enough capital to cover the losses, then the whole strategy falls apart.
Furthering that thought, if you have enough capital coming in to make up for losses in your trading, then why aren’t you investing that capital in your trading in the first place? Why wait until you are losing before investing it? Are you spending that capital foolishly during profitable periods?
While Israelsen’s idea sounds very interesting from a theoretical perspective, it may not be very helpful in actual trading.
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