Introducing the Trade Risk Index

Starting fresh in 2022 we are going to start reporting the performance of our trading systems under the Trade Risk Index.

What is the Trade Risk Index?

The Trade Risk Index represents the aggregate performance of all publicly run trading systems on the Trade Risk. At the time of writing this, we currently have two distinct fully rules-based trading systems: Merlin and Lamorak.

Both of these trading systems were built with the same goals in mind:

  1. Beat the returns of buy and hold portfolios
  2. Do it with much smaller drawdowns
  3. Spend less than 10 minutes per day trading

The way each of the systems aims to achieve these goals is very different and that’s because the underlying trade logic, hold times, and rules for Merlin and Lamorak are unique.


How is the Trade Risk Index constructed?

The goal is to evenly allocate 50/50 across both systems.

That means a $100,000 portfolio would have $50,000 allocated to Merlin and $50,000 to Lamorak. Of course, once live trading starts, the portfolio values ebb and flow with one another and occasionally one system may start to outperform more significantly causing an imbalance in allocations.

Rather than get into a recursive loop of constant rebalancing every day, we put rebalance bands around the overall portfolio (index) and rebalance only when one system starts to have a 10% or greater allocation versus the other.

In these situations, we sell positions and move cash from the larger trading account to the smaller account, keeping intact all of the exposure levels and allocations within each system.


How is performance reported?

We use a third-party auditing service called PortfolioAnalyst that monitors our live Interactive Brokers Pro trading accounts and generates all of the monthly and annual performance numbers and metrics you see reported each and every month.


Why create an index? Why trade two systems?

As we mentioned earlier, both trading systems have different underlying logic. They buy and sell at different points in time and carry different exposures depending on the market environment. In fact, there may even be times when one trading system is buying a stock while the other is selling it short!

What this does is create diversification among a single overall portfolio. Take this historic return table as an example:  

MonthMerlinLamorak50/50 Blend
November 2016+9.12%-3.75%+2.68%
March 2020-7.38%+12.48%+2.55%
September 2020-1.32%+7.99%+3.33%

Notice in each of these months, we saw one trading system perform exceptionally well while the other trading system wasn’t so strong. Of course, if you were all in on the strong system, you were very happy, but the point is, you will never know which is going to be strong ahead of time, so the optimal strategy is to allocate to both.

By running a portfolio containing both trading strategies, maximum drawdowns are reduced, more months end with positive returns, and sharpe ratios are higher.

The Trade Risk Index

We strongly believe in combining unique trading systems together in order to be most effective at reaching our goals of beating buy-and-hold portfolio returns while maintaining smaller drawdowns.

The Trade Risk Index helps us showcase in a simplified fashion, how the collection of our systems has performed. For those of you who want to dig deeper into the numbers, we’ll always show you which system contributed to the monthly gains/losses on our performance page and monthly blog updates.

If you’d like to test drive our trading systems, check out our $1 trial offer to get started.

February 2024 Update

We’re excited to introduce a third trading system, Galahad to the Trade Risk Index. Galahad is another unique trading system that operates on even longer time frames and trades ETFs exclusively in a trend-following manner. This will further enhance diversification benefits within the TR Index while staying true to our original three trading system goals.

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Evan Medeiros

Evan is the founder of the Trade Risk. With 25 years of coding experience and a B.S. in computer science, Evan brings a systematic discipline to investing in the stock market.

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