Adrian Reid explains a practical procedure for deciding the order in which to implement trading systems after capital allocations are set. Using a capital-allocation spreadsheet, he recommends zeroing allocations, then adding each system back one at a time (at its planned ultimate allocation) to measure which system most smooths the portfolio equity curve and which adds the greatest diversification benefit next.
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Once you've decided on the capital allocation that you're going to use in your portfolio, so what systems you're going to trade, what percentage you're going to allocate to each system, you've still got a really big question that you have to answer, and that is, which system do I implement first, and then second, and then third, what sequence do you implement your strategies in? So here's what you're going to do. You're going to take your capital allocation spreadsheet with all of the strategies and the weightings that you figured out for your ultimate portfolio, your in state portfolio you're trying to work towards, and you're going to decide which one you can implement first. So zero out all of the capital allocations, but make sure you've saved a copy of what percentage you're going to allocate to each system. And then what you're going to do is add those systems back in one at a time and see which one has the biggest impact first. So start with the first one, put its allocation in, zero everything out, and then try each system one at a time at its ultimate allocation that you've already figured out and see which one smooths your equity curve the most.
And then once you've got two, the rest are all zeroed out, but you know what their ultimate allocations are going to be. Then you put them in one at a time and see which one adds the best diversification benefit next, and so on. This is actually super clever. I can't believe I've never thought of it, but I think that's the way to do it.
