Adrian Reid explains a capital allocation approach for managing multiple trading strategies. He recommends assigning each strategy a maximum percentage of total account capital, then on each day multiplying the live account balance by that percentage to determine how much capital that strategy may use. He contrasts a simple equal-reserve approach (e.g., 10% per strategy) — which prevents overlap but leaves idle cash — with a backtest-driven allocation where historical strategy exposures are scaled by chosen percentages to estimate day-by-day total account exposure and ensure acceptable account-level leverage.
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So when you're trading multiple strategies, you need a capital allocation model that tells you how much capital each strategy has access to. And so the way I do it is I'll design. So every strategy gets a percentage of your total capital. And on each day you look at your total account balance and you multiply that account balance by the percentage of capital. That's the maximum percentage of capital each system can have. And that is the. The then gives you the amount of capital you use for position sizing and figuring out whether you can, you can take more trades or not. Yeah, it tells you whether you're full. And you have that number for each strategy when you combine the strategies. The simplest way, which is not good, but it's the simplest, is to say, let's say I've got 10 strategies and I just give 10% of my capital to each strategy. And that capital doesn't overlap. It's reserved for that strategy. Making sense so far. If that capital is reserved for that strategy, then it's always there, so there's no conflict.
So it's just, that's, that's the strategy, that's the capital for system A, that's the capital for System B, C, etc. So there's no conflict. That's the simplest way. The trouble with that method is you end up with a lot of cash sitting around doing nothing. Because not all strategies are invested all of the time. That makes sense. So Instead of saying 10%, 10%, 10%, 10%, 10% for my 10 different strategies, instead what you do is you take the history, the back test of each of your strategies, and you add them together with a capital allocation percentage. And you can vary those percentages to, to see at the total account level how much exposure you would have had day by day. Does that make sense? Yes. So every day we, we, we have. Let's say you have.
Let'S say you have two strategies. Let's keep it real simple.
And you allocate a maximum of 50% of your capital to what strategy A. And you allocate a maximum of 75% of your capital to strategy B. But strategy A and B are not invested at the same time, so it's not necessarily going to be 75% plus 50%. One of them might be in the market and the other one's not, and vice versa. So when you've got these, these percentages, then you can get the back test of each strategy and you can say, okay, 50% of this one, 75% of that one. What's my total exposure? Day by day in the history of the back test.
Yeah. And so essentially what you end up doing, end up having, is a capital allocation that gives you an acceptable level of leverage at the account level.
And if you've got an acceptable level of leverage, which might be no leverage, just only invest cash, or it might be a little bit of leverage, but if you've got an acceptable level of leverage, then again at the strategy level, there's no conflicts because you know that on every day there'll be enough capital to run that strategy, because you've tested it historically. So there's the simplest way, which is slices of capital reserved, and then there's this, the more advanced way, which is we have slight. We have a percentage for each system, but they don't necessarily add to a hundred, they can go over 100, because we know the strategies aren't invested all of the time. The best example of that is a strategy that makes money in a bull market and a strategy that makes money in a bear market, if they're mutually exclusive, like you said, could have 100% for strategy A, 100% for strategy B. And you never run out of cash because they're never in the market at the same time. In reality, it's not quite so neat as that. Most of the time, strategies come in and out. So we need to sort of look at the whole portfolio level when we do that. And in the trade success system, I've got a whole course on how to do that, and I've got a spreadsheet that sucks in all the information and does it for you. But, you know, just conceptually, that's the way it works. SA.
