In the previous post on money management, I discussed the overall allocation of assets across various trading and investment accounts and vehicles. Here, I’d like to drill down a bit and concentrate on money management within a single vehicle. Whether the vehicle is stocks, bonds, currencies, options or whatever, it still may be necessary to allocate funds among various strategies within that one vehicle.
For example, equity traders and investors may want to earmark some funds to value investing and others to momentum investing. Fixed income investors may allocate assets among issuers, durations, and/or credit quality and return. Option strategies abound, so option traders may divide their funds among such strategies as selling covered calls, spreads, straddles, and pure directional speculation.
I’ll use my own forex account as another example. I used to have my account divided into three sub-accounts; one for carry trading, one for pure fundamentally based long-term positions, and one for shorter-term tick density trades.
What this allocation by strategy allows you to do is compare the efficacy of pure strategies with each other. Then, you can decide which to keep using, which to drop, and how much to allocate to each active strategy. For example, when it was clear that my carry trading strategy wasn’t working well, I suspended that strategy, emptied that sub-account, and re-allocated the funds to other more profitable strategies.
More recently, after determining that my other strategies were working well on their own, I combined the sub-accounts and strategies into the combined one that I use today in my day to day trading operations. But when I develop additional strategies, you can be sure that I’ll be trying them out in their own separate sub-accounts first, with their own allocated funds.
So I just wanted to add that little addendum to the Money Management part of my series on trading tactics. As I mentioned before, next week’s post will concentrate on position sizing and risk control within a forex account.
Stay tuned for that, and…keep pipping up!
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