Trade Everything: Trend Following Principle

What you trade is critical. It may just be the most important issue. Here is the conundrum: You cannot trade everything, but you cannot trade only one market either. You need to be in a position to be following enough markets that when a market moves you can ride it, as diversification is the only free lunch you get. It allows you to spread your potential targets of opportunity broadly across currencies, interest rates, global stock indices, grains, softs (wheat, cotton, etc.), meats, metals, and energies. You do not need to know the markets name. They are all the same when you look at price data only. If they are all the same, then an opportunistic strategy that is ready to go when a trend starts can make you serious money.

The following is an example of a diversified portfolio that you could use as a starting point for assembling your own portfolio (with the exchanges listed where markets are traded):

  • British Pound (CME; www.cmegroup.com)
  • Canadian Dollar (CME)
  • Euro (CME)
  • Swiss Franc (CME)
  • Japanese Yen (CME)
  • Australian Dollar (CME)
  • Mexican Peso (CME)
  • Eurodollar (CME)
  • Euribor (NYSE LIFFE; www.euronext.com)
  • Aussie Bank Bills (ASX; www.asx.com.au)
  • U.S. 10-Year Note (CME)
  • U.S. 30-Year Bond (CME)
  • Canadian Govt. Bond (CME)
  • Long Gilt (NYSE LIFFE)
  • Euro-German Bond (EUREX; www.eurexchange.com)
  • JGB (TSE; www.tse.or.jp)
  • Aussie 10-Year Bond (ASX)
  • Wheat (CME)
  • Wheat (KCBT; www.kcbt.com)
  • Corn (CME)
  • Soybeans (CME)
  • Soy Meal (CME)
  • Bean Oil (CME)
  • Canola (ICE; www.theice.com)
  • Cotton (ICE)
  • Sugar (ICE)
  • London Sugar (NYSE LIFFE)
  • Coffee (ICE)
  • Coffee Robusta (NYSE LIFFE)
  • Cocoa (ICE)
  • Cocoa (NYSE LIFFE)
  • Orange Juice (ICE)
  • Milk (CME)
  • Lumber (CME)
  • S&P 500 Mini (CME)
  • Russell 2000 Mini (CME)
  • FTSE 100 (NYSE LIFFE)
  • Nikkei (SGX; www.sgx.com)
  • Euro Stoxx 50 (EUREX)
  • Hang Seng (HKEX; www.hkex.com.hk)
  • Australian SPI 200 (ASX)
  • Lean Hogs (CME)
  • Live Cattle (CME)
  • Feeder Cattle (CME)
  • Platinum (CME)
  • Silver (CME)
  • Gold (CME)
  • HG Copper (CME)
  • Aluminum (LME; www.lme.com)
  • Nickel (LME)
  • Zinc (LME)
  • Light Crude Oil (CME)
  • Brent Crude Oil (ICE)
  • Heating Oil (CME)
  • Gas Oil (ICE)
  • Unleaded Gas (CME)
  • Natural Gas (CME)
    source: Abraham Trading Co.

That’s diversity, and anyone can trade those markets today using Exchange Traded Funds (ETFs) or futures markets. If you say you can’t, you are making excuses. It’s one thing to calculate your risk on any one trade, but you live and die by the sum of multiple risk factors, which is why you calculate your portfolio risk too (source: Francais Vaca quoted in CTA Confidential, An Ongoing Series of Qualitative Investigations into Managed Futures Trading Programs).