We are trading with a $100,000 corporate trading account and use eight portfolio rules to guide us within the team to optimize the performance. Get to know our trading and money management rules and set up fixed rules for managing your portfolio as well.
Why do you need rules for keeping a trading account?
The word ‘rules’ reminds many people of limitations and it has negative connotations, but rules also have positive aspects and can be helpful and beneficial. We have set rules for our $100,000 real money account to protect us and the account.
Why are rules protecting us?
We are protected by a fixed process for each trade because we cannot act alone and must also justify our trades. This is done by voting on individual trades and an “even distribution of debt” when a trade is going badly.
Why do rules protect the trading account?
The trading account is protected by the fact that no trader can carry out a trade alone without the consent of another trader. This is guaranteed by a complete documentation and can be checked at any time afterwards. This process keeps the account from errors of individual traders, which could happen due to haste or by simple careless mistakes.
What are the specific portfolio rules for the $100,000 real money account?
For our portfolio, we have set a total of eight portfolio rules, all of which are intended to protect the account and the documentation:
#1 1% Risk Per Trade
We only bet on trades whose loss does not exceed 1% of the trading account. This also means that we calculate the total risk for trades in which we want to open several positions by means of scaling-in, for 1%.
For new trades, we always make sure that we do not have excessive cluster risk. If we have several good spots in one industry or with a particularly high correlation, we lower the individual risk per trade.
Exceptions for portfolio rule # 1
Two exceptions exist:
- Should a particularly good spot arise, but the trade idea requires more than 1% risk, then 3 traders must agree.
- Another exception are our long-tested and monthly butterfly strategies, which generally risk slightly more than 1%.
#2 Futures – Last Trading Day
If futures are to be traded, then it is important to pay attention to the effective maturity of the future. Since we do not want to have futures in the portfolio, which only has 7 effective trading days, the chosen contract is of great importance.
Simple example: The futures contract on WTI Crude (CL) with the maturity September has its effective last trading day on 17th of August, so we want to close it by 10th of August at the latest. This fact strongly affects the choice of the right contract.
#3 Monthly Team Meeting
In order to respond to changes in the markets appropriately, we have almost daily individual discussions, which usually take place between Matthias D. and Matthias K., yet it is essential in our opinion that also traders in our team once a month on the current state and to be informed of the development. This is also important because it gives feedback and allows new ideas and impulses to be created.
#4 10% Rule
The 10% portfolio rule states that we do not want to tie up more than 10% of our capital in margin in a single position. Thus, the 10% rule restricts and protects us against too large positions and thus indirectly against too big risks.
Simple example: Assuming we wanted to buy 4 futures contracts on WTI (CL), but the margin is $11,000, then we can only buy 3 contracts so as not to violate the 10% rule.
#5 30% Rule
30% of the account may be used for stocks and equities, with the nominal value and not the margin being decisive. We currently have approximately $27,000 worth of stocks in the portfolio, which is in line with this rule.
We do not have similar portfolio rules for other financial instruments, as we also short in other assets. The 30% rule only applies to the long investments of our shares that we want to hold for the long term.
#6 60% Rule
The 60% portfolio rule protects our account by using a maximum of 60% of the account balance for margin. The reason for this approach is quite simple: We want to be able to react when it gets turbulent in the markets. This is only possible if you still have margin available and able to act. Currently, our margin utilization is around 35%.
#7 Dual Control Principle
The dual control principle should be familiar to everyone and that is probably because it has proven itself. We also follow this principle when making trade decisions. No trader is allowed to carry out a trade completely on his own. It always requires further approval from a second trader, limited by the number of authorized persons. Only when a second “GO” has been given, the trade can be carried out.
All our trades are documented and thus also who has been responsible for what, which is fixed in Rule #7. The documentation of a trade follows a defined sequence:
- Trade proposal and discussion
- GO from first person
- GO from a second person
- Execution of the trade (you can also set a pending order)
- Numbering of the trade, if it was triggered
- Announcement in Slack (our signal and chat community for premium members)
- Management of the trade
Each trade can subsequently be completely understood from idea generation to execution, which allows us to avoid occurring errors in the future.
Does it make sense to set portfolio rules for smaller accounts?
The answer is clearly YES. It makes sense to apply some of the rules we use to smaller accounts as well. Rules on account utilization and asset allocation are always beneficial, and disregarding or even ignoring these essentials can quickly lead to problems that could easily have been avoided. Of course, you cannot use the dual control principle if you are the sole account holder, but you can, for example, get a second opinion from other traders.
How can I track the $100,000 real money account trades?
The easiest way to track the trades is our chat and signal community in Slack. This service is available to premium members for free.