Aberration Mid-Size Portfolio

The ABERRATION mid-size portfolio is suited for accounts starting in the $30,000 to $50,000 range. The portfolio is diversified across the commodity groups to gain exposure in uncorrelated markets. The commodities in each group have been carefully chosen for their profitability to risk characteristics. The portfolio is: Corn, Kansas City Wheat, Live Cattle, Cotton, Sugar, Lumber, Palladium, London Copper, Crude Oil, Natural Gas, the Dollar Index, Japanese Yen, T-Notes and the Euro-Bund. As ABERRATION provides the level of risk at the initiation of each trade, the trader can also limit risk by entering trades that are below a certain risk threshold. For example, if a trader has decided to trade the Mid-Size Portfolio and wishes to limit trades to a maximum risk of $2,000, a trade in Sugar with an initial risk of $2,200 would be bypassed. The following equity chart shows portfolio growth when risk is limited to trades with a risk of $3,000 or less.

Mid-Size Portfolio

As the graph shows, equity buildup is fairly smooth and consistent. With an average first-year profit of $21,911, the average first-year return on a $30,000 to $50,000 account would range from 44 percent to 73 percent. From the risk point of view, the average start-trade drawdown a trader could expect when initiating trading this portfolio would be $2,770, between 6 and 9 percent of starting equity. But the trader should note that in 2001 the maximum start-trade drawdown was $14,578. As equity builds, the portfolio can be expanded to maintain a high rate of return.

The following table shows portfolio performance year-by-year. The column marked average start-trade drawdown is compiled by finding the start-trade drawdown for the portfolio starting at each trade origination and then averaging the results. For example, if the portfolio generated 30 trades in a given year, 30 portfolio equity curves would be generated, one starting at the trade origination of each trade, and the low equity point found for each equity curve. The maximum start-trade drawdown for the year represents the largest point below starting equity a trader would have seen had he started trading the portfolio at the worst possible time that year. (Note that the start-trade drawdown tests every trade originating in a given year, but that the low equity point may occur in the next year. These are reported in the trade origination year averages.) The average first year profit is found by looking at each equity curve one year from the start to find the profit/loss the trader would have a ttained and averaging the results over all starting points for that year. (Note that the last year in a start-trade profit analysis will not have an average first year profit because the first trade that year will not have had a year go by.)

One way to use this information is to compare required margin plus historical drawdown against starting equity to determine a crude probability of success. For example, assuming an average margin requirement of $1,250 per commodity, and an average number of positions of 8 out of the 14 commodities at any time, required margin would average about $10,000 for this portfolio. If a trader had started trading this portfolio with $30,000 in each of the years, he would have had about $20,000 in reserves for drawdowns ($30,000 starting equity minus $10,000 margin requirement). This would have been sufficient in 21 of the 21 years, for a 100 percent probability of success.