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Model Portfolio

Model Portfolio

The Concepts
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The Concepts


In August of 2001, Globe Capital Management, Corp. (GCM) finished its preliminary study of its trading system; and on October 2001 launched its model portfolio with two (2) goals in mind:

  1. To further continue the study of its system based on the results of real money account that will include the effects of mistakes and the regular stresses associated with daily trading.

  2. To demonstrate to the public what could be achieved using what GCM considers to be sound trading practices.


This model portfolio is NOT a recommendation of a specific strategy, nor is it a recommendation to buy or sell a specific security. No trades will be pre-announced and the posted figures will consist of only percentages.

The portfolio is a real money account opened with Scottrade. All commissions, fees, interest on cash balances, margin interest and any other restrictions that could affect the results of the account are determined by Scottrade and are subject to change.

Since GCM charge management fees on the accounts of its clients, the model portfolio will show the effects of a management fee of 2% of assets and a profit fee of 20%. These fees will be charged quarterly on the last business day of March, June, September and December. Certain fixed expenses such as accounting and other legal fees, and taxes on gains are excluded from the performance reports. *As of June 28, 2002 the profit fee will be charged annually.

Most people starts their accounts with low balances and usually deposit funds on a regular basis. This model portfolio will start with a balance on the low 4 figures and will be funded on a monthly basis with small low 3 figures deposits. Because of this condition, the initial returns will be lower than those obtained during the study as the impact of commissions will be considerable. However, as the equity grows through gains and deposits, this negative impact will diminish.


The portfolio will trade a basket of 5 Exchange Traded Funds (ETF) that follows 5 major U.S. market indexes:

Diamonds Trust (DIA), which tracks the Dow Jones Industrial Average

S&P 500 Depositary Receipts (SPY), which tracks the Standard & Poor 500

Nasdaq-100 Trust (QQQ), which tracks the Nadaq-100

S&P 400 Depositary Receipts (MDY), which tracks the Mid Cap Standard & Poor 400

iShares Russell 2000 (IWM), which tracks the Small Cap Russell 2000

Trading Strategy

The account will be traded using GCM Supercharged Index Trading system. While its details are the property of Globe Capital Management, Corp. and its intended to be used only by its traders, a brief description is provided below:

How GCM Supercharged Index Trading Works

The relatively recent introduction of ETFs has made possible market index trading for small investors. An ETF is a Fund that trades like a regular stock. There are as many ETFs as there are indexes. GCM concentrates only in the ones that tracks the major U.S. stock market indexes: The Diamonds Trust (DIA), which tracks the Dow Jones Industrial Average; The S&P 500 Depositary Receipts or Spider (SPY), which tracks the Standard & Poor 500; The Nasdaq-100 Trust (QQQ), which tracks the Nasdaq 100 (not to be confused with the Nasdaq Composite); The S&P Mid Cap 400 Depositary Receipts (MDY), which tracks the Standard & Poor 400; and the iShares Russell 2000 (IWM), which tracks the Russell 2000 index of small cap companies.

Although these securities are funds, they are traded on the stock exchanges in “real time”, meaning that their prices are updated continually and can be bought and sold at any time during the exchange’s trading day. By contrast, mutual funds that tracks similar market indexes have to be bought and sold at the end of the day and at that day’s closing price. Also, unlike conventional funds, ETFs can be bought on margin and can be sold short.

Today, billions of dollars are traded daily through ETFs.

Market Confirmation vs. Price Prediction

Unlike the competition, we do not attempt to predict market direction. Instead, our system’s indicators merely detect the changes in market trends and trades in its direction. Our system works in both, up and down trends.

By waiting for the markets to confirm its direction, our system is always “late” in its entries and exits. In other words, we don’t attempt to catch the exact bottoms and neither to jump at the top, something that we consider impossible to do consistently. However, the advantage of our approach is that we enter the markets when the downside risk is at its lowest and we exit them when the risk of cutting our profits short is at the lowest level.

Being Rich vs. Being Right

Most trading systems make emphasis in being right. “You can’t go broke taking profits” is a common trader’s say. However, many traders go broke doing exactly that! If you are right 9 times out of 10, with average winnings of $1 per attempt, and you are wrong only 1 time out of 10, with a loss of $10, you will have a net loss of $1 over the long haul. By contrast, if you are right only 3 times out of 10 but your average win is $3 and your average loss is $1, despite the fact that you lose 7 times out of 10, in the long run, you end ahead by $2. The combination of probability of win/lose and average gain/loss is called expectancy. This is the concept behind the old Wall Street cliché of “cutting your losses short and letting your profits run”.

One of our edges over the competition is that we, at GCM, make it OK to lose from time to time. No body wants to lose money, of course, and we are not the exception. However, we recognize that trading is a business in which losses are unavoidable. Therefore, our efforts are directed toward the achievement of the highest positive expectancy possible. Although our strategy has a reliability of more than 70% (meaning that only 30% of our trades are losers), our objective is to lose the least possible when we are wrong while maximizing our gains when we are right. Our strategy is designed to get an expectancy of $0.50 or more. This means that, over the long run, EVERY trade will yield 50 cents per each dollar risked (not to be confused with “per dollar allocated”). For GCM, 1 dollar invested is NOT 1 dollar risked. Our system is designed to limit our risk to only a tiny fraction of the total amount allocated. Whenever we enter a position we expect it to move in our favor, like everybody else does. However, unlike most people, when the market moves against us, we humbly accept the fact that such things can happen, and as soon as our pre-set down limit is reached, we abort the position immediately. Sell first; ask questions later; is our motto. The safety of our client’s capital comes first! Our strategy usually limits our risk to only 1 to 6 cents per each dollar allocated.

Position Sizing, The Cornerstone of CGM Trading

Dr. Van K Tharp calls position sizing, the most important aspect of any trading system. He defines it as “the part of your system that tells you how much to risk on any given trade”. This is an area in which GCM has a tremendous advantage over its competition. Position sizing is an integral part of GCM trading system. While our technical indicators tell us when to buy and when to sell, our position sizing algorithms tell us how much capital will be allocated among the basket of securities that GCM trades.

GCM uses one of the most sophisticated models for capital allocation available today: The Percent Volatility. Our trading strategy utilizes the concept of Average True Range (ATR) to assess the probable amount of risk per share that we are likely to encounter during the course of a given trade. This risk is constant among all of GCM managed accounts. Our position sizing algorithms relates the risk per share with the account’s equity to determine how much to invest in a single position.

For example: On a $10,000 account with a limit on exposure to volatility of only 1% of the account equity per position, let's say that the strategy gives an entry signal for QQQ at a price of $40.00 per share, and the ATR for the last 10 days is 1.50. The total risk allowance is 10,000.00*0.01 = 100. The volatility per share is 1.50. Thus, the maximum number of shares that can be purchased is 100/1.50 = 66 (the number is always rounded down). At $40.00 per share, the total allocation is 66*40.00 = $2,640.00 While this number may seem too low in this example, it is not uncommon that, during strong up trends, our positions needs to be trimmed down because we get entry signals on several securities at the same time and we end hitting the 2X leverage limit on stock trading!

Position Sizing and Our Client’s Goals

Since the risk per share is a function of the volatility of the securities that GCM trades, this parameter is constant among all accounts that GCM manages using this strategy.

The variability of reward-to-risk ratios is a function of the position sizing parameters; which varies from the conservative 1% of account equity with a maximum portfolio risk of 5% (which means up to 5 concurrent open positions, each with an initial risk of 1%); to the aggressive 1.75% of out-of pocket equity plus 6% of market gains for a maximum portfolio risk of 25%!

Reliability & Expectancy

Our preliminary study shows a reliability above 70% and a final expectancy of over 60 cents per dollar risked. These figures will constitute our target goals. Because of the small initial equity, we estimate that the system will achieve its target expectancy by the end of the 2nd year.

Position Sizing Algorithms

Given the high level of reliability that the strategy showed during the preliminary study, we will use an aggressive approach to size our positions.

Equity Model

We will use a “Total Equity” model as defined by Van K Tharp’s Special Report on Money Management.

Sizing Model

We will use a “Volatility Model” based on the 10-day exponential moving average of the security’s true range. There will be a distinction between the capital contributed and the market gains. We will use a level of 1.75% of contributions, and a level 6% of the market’s gains.