A Superior Approach to Micro Portfolio Construction

Each trader will have different amounts of risk capital and different levels of risk tolerance. Some will only want to, or be able to afford to trade a small portfolio. Others may want to and may be able to trade larger portfolios. Regardless of the level of risk capital and risk tolerance it is possible to trade with the trend on smaller portfolios.

However it must be stated that trend trading works better on larger portfolios because it increases the chances the portfolio will contain a number of markets that will experience good trends each year. Smaller portfolios, by containing less markets, run the risk of missing out on a number of those markets that trend.

Consequently, those with smaller accounts can be disadvantaged on two counts;


Generally smaller portfolios vis-à-vis larger portfolios, can suffer the risk of under performance as it’s never known which markets will trend, when they will trend and for how long they will trend. Smaller portfolios, by definition, will trade less markets, increasing the risk traders will miss out on some markets that experience great trends.

Data mining
Traders with smaller accounts are forced to make a deliberate decision on which few markets they trade. They’ll usually be influenced by a market’s historical performance, preferring to pick the better performing markets over the poorer performing ones. As inevitable as night follows day yesterday’s good performing markets are generally never tomorrow’s best performing markets, resulting in smaller traders falling into and suffering from the classic trap of data mining.


So unfortunately traders with smaller accounts can suffer a double whammy. The risk their smaller portfolio will not contain those markets that will experience great trends and secondly, the risk of picking yesterday’s winners who will usually become tomorrow’s losers.

If you can afford to trade a large portfolio then you can do as I do, and trade my P24 Portfolio.

For my personal P24 portfolio of 24 futures markets I’ve used objective and independent criterion to select it, diversity and liquidity.

Diversity to minimise the risk of correlation between markets.

Liquidity to remove the risk of favouritism, or cherry picking.

Using both eliminates the risk of data mining.

For each of 8 different market sectors (indices, currencies, interest rates, energy, metals, grains, meats and softs) I select the 3 most liquid futures contracts as defined by their average daily volume.

This dual selection criterion eliminates my risk of falling into the trap of data mining where we only focus on the best performing markets for our strategies.

However, I understand not everyone has either the desire, or risk capital available, to trade a large portfolio.

I know those with either less risk capital or a lower tolerance for risk (drawdown) will prefer to trade smaller portfolios.

I know less experienced traders will have a preference to begin small.

Accordingly for traders with less risk capital I recommend micro portfolios called P2, P4, P8 and P16, which have also been selected using the diversity and liquidity criterion.

Please refer to the following page; Portfolio

These portfolios are fine, however traders can do better.

They can do better once they learn my PortX³ methodology.

PortX³‘s methodology allows traders to create better micro portfolios.

At the moment I only teach PortX³ during my Workshops.

PortX³ is an objective and rule based methodology that is universal across all markets, not just futures, and does not require any subjective interpretation or personal opinion.

After learning PortX³‘s technique  traders will never again fret about the decisions they make when selecting one market over another.

PortX³ only requires a pool of markets to choose from and the number of markets a trader can afford to trade. Traders then just follow the rule based construction technique and voilà, they will have created an arms-length, independent and objective boutique portfolio where no personal and subjective opinion or decisions have been made.

Take a look for yourself and see how well Universal Trader performs over two PortX³ micro portfolios containing 4 and 8 markets. The third chart contains 24 markets for comparison purposes.

The equity curves cover 1980 to 2020 representing 40 years of performance.

Strategy: Universal Trader (KL, KB, KS & KE)

PortX³ doesn’t only work well on Universal Trader.

It’s a robust micro portfolio construction methodology that works well across all trading strategies.

And it should.

To avoid the classic trap of “data mining” a traders portfolio construction should always be independent of their trading strategy.

My P24 portfolio is independent of my strategies as I select the markets based on the objective and independent selection criterion of diversity and liquidity.

PortX³ also uses objective and independent selection criterion to construct micro portfolios.

Take a look below at how well PortX³ works cross multiple longer term trend trading strategies, strategies that work best on large, not small, portfolios. But with PortX³ they perform reasonably well, not as well as they do on the larger P24 portfolio, but admirably well when there is real risk of underperformance and data mining when traders are forced to trend trade fewer markets.

As you’ll see PortX³‘s good performance over alternative longer term trend trading strategies not only demonstrates its effectiveness, but also its robustness.

Each strategy is detailed in my book The Universal Tactics of Successful Trend Trading (Wiley, 2020).

Each strategy is run over two PortX³ micro portfolios containing 4 and 8 markets while the third chart, for comparison purposes, shows the strategy over the larger P24 portfolio.

The equity curves cover 1980 to 2020 representing 40 years of performance.

Strategy: GX52 (please refer to p188 Universal Tactics of Successful Trend Trading)

Strategy: 4WR (please refer p210 Universal Tactics of Successful Trend Trading)

Strategy: D52R (please refer p213 Universal Tactics of Successful Trend Trading)

Strategy: MWDT (please refer p358 Universal Tactics of Successful Trend Trading)

PortX³‘s effectiveness across multiple strategies over micro portfolios underline its robustness.

Really, trend trading over smaller portfolios should not work at all.

Trend trading’s effectiveness is basically defined by the size of the net it can throw over markets. The larger the net, the greater the throw, the better the chance the net will catch some markets that will trend each year.

Throwing a small net reduces the chances of catching any trends.

So trend trading over smaller portfolios should not work.

But as you can see PortX³ is able to perform admirably well over small 4 and 8 market portfolios across multiple strategies.

PortX³ is a game changer.

With PortX³‘s selection technique smaller traders can now trade with confidence knowing they have avoided “data mining”. Knowing they’ll have the best chance to enjoy enough good trends each year to build their account balances!

To learn PortX³ you will need to attend a Workshop, and in my opinion, I believe just learning PortX³ all by itself would be well worth the cost of attendance.