Adrian ReidFounder of Enlightened Stock Trading

Allocating Capital To Trend Following And Mean Reversions System

24 Sept 2021 · 0 min

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Adrian Reid explains tactical ways to allocate capital between trend-following and mean-reversion trading systems. He describes two practical approaches: (1) keep most or all capital in the trend-following system while taking occasional, small leveraged or unleveraged mean-reversion trades when that system signals; (2) set hard capital caps so the trend-following system receives a reduced maximum allocation (e.g., 95%) while the mean-reversion system can use up to 100% of its capacity but with low average exposure (example: ~5%), keeping total typical exposure near 100%.

Questions this video answers

September 24, 2021.

5% (example).

Well, the two options were you have most or all of your money in trend following, and you have one mean reversion system. And the one mean reversion system only has a small amount of exposure on it on average. And so what you do is you basically say, okay, my trend following has all of my money, but whenever my mean reversion system gets a signal, I'm going to take it anyway and I'm going to go into a small amount of leverage.
Just to take that mean reversion trade. And then when that trade closes out, I'll just close it and my trend following will just keep on continuing with 100% allocation of my capital. So works, provided you've got a low exposure mean reversion system, the other option, and you don't even have to go into leverage because what you can do is say, okay, my main reversion system, if I give, if I gave my mean reversion system 100% of my capital on average, let's say it had 5% exposure, so what you could do is you could say, all right, I'm going to give my Trend following system 95% of my capital max, and I'm going to give my mean reversion system 100% of my capital. And so on average.
My total exposure shouldn't go much over 100%.
Does that make sense? Because you know, your mean reversion system has a exposure of only 5% on average.