Home Investing & Trading How To Allocate Your Portfolio To Maximize Gains And Minimize Losses

How To Allocate Your Portfolio To Maximize Gains And Minimize Losses

by Steve Shelton

If you ask any successful person in finance what the secret to success is they’ll tell you that it comes down to the three R’s. These are…

  • Right time
  • Right place
  • Resources sufficient to take advantage.

Most times the first two are more a matter of sheer luck than anything but with careful planning they can be anticipated within a month or so, therefore the primary trick to master is how to handle the third R, Resources.

I’m going to assume the reason you’re reading this is you have a portfolio with a mix of cash and crypto and you’ve seen it decline enough to cause tears to flow. Most of those tears were due to incorrectly allocating your portfolio. Had you only taken a mostly cash position at the outset of the decline you’d be sitting pretty right now.

But not all is lost. If you follow this guide you’ll be able to re-allocate and be in a position to take advantage when the current long-term downtrend breaks and so that’s what we’ll cover now.

No matter how much or how little you have to work with, correct allocation of resources is key.

My technique is based on the 80/20 principal which states that 80% of the work should be done by 20% of the resources. 80% of your gains will come about 20% of the time, but 80% of your losses will also come about 20% of the time. Therefore we want an allocation strategy that leaves us in the correct position.

To do this properly you need to know a few terms, and honestly if you don’t know these terms already you probably shouldn’t have been day trading yet.

Must-Know Terms

Term #1 SMA – Simple Moving Average, for any given time frame the SMA is just the average close of all candles in the window. For example on a 2 hour window with 1 minute candles, your SMA is the average close of all 120 candles.

Term #2 EMA – Exponential Moving Average, for any given time frame the EMA is the average close of all candles in the window, however there is an exponential back off applied to older candles and this makes it far more sensitive and thus responsive to later candles than to earlier ones.

Tern #3 Trend – For our purposes a trend is defined as any time the EMA crosses the SMA. When the EMA is above the SMA we say the trend is up. When the EMA is below the SMA we say the trend is down.

Term #3 NAV – Net Asset Value, this is the total of all assets in your portfolio converted to dollar terms. For our purposes if you have crypto assets, we multiply the amount of crypto by the current SMA and add it to cash in order to calculate NAV.

Term #4 RSI – Relative Strength Indicator, the RSI is used to gauge the strength of a trend. It is the number of up closes over down closes over the 14 most recent candles with some math applied to yield a range between 0 and 100. An RSI above 70 is considered overbought and all other things being equal you should sell in order to lock in some profits. Conversely an RSI below 30 indicates the trend is oversold and you should consider buying if the trend is up and the RSI is below 30, this will give you a good clean in and out path.

Term #5 TCO – Total Cost of Ownership, this is the volume weighted price you paid for your crypto. Example if you bought 1 BTC at 6000, then 2 more a week later at 3000, your TCO is $4000. It is important to know your TCO at all times, because regardless of what the RSI is telling you, you should never buy crypto for more than your TCO unless you’re already in an all cash position, or if all trend crossing indicators are showing this is one of those unstoppable upswings and you didn’t get into position quickly enough before hand. TCO is also important, because if your TCO is above the market, you can make purchases on the lower edges of the market in order to bring your TCO back in line and when your TCO is inline with the market (or below it), you are optimally positioned regardless of which direction the market takes.

Allocation of Resources

Now you know these terms let’s examine how to allocate. First off calculate your NAV, then divide it into fifths. Each fifth represents a particular trend. The first 1/5 is always cash, never touch it. It is there as a backstop so you have a little liquidity if the market goes differently and makes a sharp break. The second fifth is tied to the daily time frame. Almost always this 20% should be used for trading into and out of crypto. You can use a strategy here that works depending on the trend, but the point is this is your primary risk capital. That leaves 3/5th to allocate. In order to allocate it properly you need to look at the 3 day, 1 week, 2 week and 4 week horizons.

Notice that there are 4 horizons to consider but 3/5th of your money under consideration? What you are looking at here is EMA on the shorter time frame vs SMA on the longer time frame.

For example if the 2 week EMA is higher than the 4 week SMA, add 1/5th to your risk capital. If the 2 week EMA is lower than the 4 week SMA, then keep it as cash. If the 1 week EMA is higher than the 2 week SMA, add 1/5th to your risk capital, if not then keep it as cash. If the 3 day EMA is higher than the 1 week SMA, add 1/5th to your risk capital, if not then keep it as cash. Finally if the 1 day EMA is higher than the 3 day SMA add 1/5th to your risk capital, if not then keep it as cash.

That’s right if the 1 day EMA is lower than the 3 day SMA, do not trade, or at least do not buy. Do your best to try and get out of crypto and back into cash. However once the 1 day EMA is higher than the 3 day SMA, you are in an uptrend and should be using 20% of your money to trade. I recommend using Bollinger bands and the RSI for timing your entry and exits and setting your prices because they are reliable and will combined they have the potential to capture 90% of each swing.

Once you have this information, take your total NAV and apportion it as above. Don’t simply sell at market if the allocator is showing you’re too crypto heavy. Instead use Bollinger Bands and the RSI to price and time your sales both into and out of the market, then simply give favor to the allocator before you make your next move. This will keep you from flushing your assets down the toilet, chasing a crashed price in the hopes of setting some magical numbers to their recommended values. That never benefits anyone. But once your allocations are correct, ensure you check them daily. Remember a profit isn’t real until it’s realized, the same goes for losses.

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