MID-SIZE PORTFOLIO

The Aztec mid-size portfolio is suited for accounts starting in the $40,000 to $60,000 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: Kansas City Wheat, Corn, Soybeans, Lean Hogs, Cotton, Coffee, Lumber, Copper, London Nickel, Unleaded Gas, Crude Oil, Natural Gas, Japanese Yen, British Pound, T-Notes and the Australian Bond. As Aztec 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 $2,000 or less.

Aztec Mid-Size Portfolio Equity Curve

As the graph shows, equity buildup is fairly smooth and consistent. With an average first-year profit of $42,471 the average first-year return on a $40,000 to $60,000 account would range from 70 percent to 106 percent. From the risk point of view, the average start-trade drawdown a trader could expect when initiating trading this portfolio would be $5,430, between 9 and 14 percent of starting equity. But the trader should note that in 1997 the maximum start-trade drawdown was $33,318. 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 attained 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. )

Forming a reward to risk ratio by dividing average start-trade drawdown into average first-year profit, the result is 7.82. This metric can be used to compare portfolios against each other.

By looking at the distribution of all start-trade drawdowns, a probability of success can be determined. The following graph shows the distribution generated by the software. It shows the probability of experiencing a start-trade drawdown of a certain amount of dollars or less. For example this portfolios distribution shows that 55 percent of the time traders initiating the trading of this portfolio would experience a start-trade drawdown of $2,000 or less. And 75 percent of the time, the start-trade drawdown would have been about $4,000 or less. Conversely, 25 percent of the time the start-trade drawdown would have been greater than $4,000.

Aztec Mid-Size Portfolio, Start-Trade Distributions

If margin estimates and starting account equity are factored in, the probability of success can be determined. The margin requirement for this portfolio was $31,823 on 1 January 2000. If starting account equity were $40,000, approximately $8,200 of reserves above the margin requirement is left for a start-trade drawdown cushion. Entering the figure with $8,200 and reading over to the line, historically there was about a 90 percent probability of success. But if an account was initially funded with $60,000, the $28,200 of reserves would yield a 98 percent chance. This type of analysis is instructive, but remember the maxim, "A STRATEGIES'LARGEST DRAWDOWN IS ALWAYS IN THE FUTURE".