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Covalency

Someone asked, "What in the world is 'covalent bonding of futures pairs?'"

Covalent bonding of futures pairs is said to create the best trading system portfolio structure. After the most stable individual futures parameters have been selected, the optimal portfolio should be created. Atoms share electrons to form molecules of a substance. This same covalent bonding process finds the trading system's most profitable futures, then tests all futures to find the best futures pair, and then the best possible futures for the optimal portfolio. Often the best futures, most profits divided by lowest draw-down, will not be part of the best futures pair. Covalent bonds share the daily equity runs so when one futures or pair loses money, another futures or pair should gain equity. Adding the euro to T- Bonds, or Japanese yen to the British pound, may lower the combined maximum equity draw-down to a figure lower than the maximum equity draw-down of either individual futures. This is the function of covalent bonding applied to optimal portfolio construction.

The optimal portfolio structure is completed when the percentage of individual futures equity gain increases less than percentage of maximum equity draw-down. Portfolio A makes $500,000 with a maximum equity draw-down of $25,000. Adding a new futures increases the profits by 10% to $550,000, buts also increases the equity draw-down from $25,000 to $30,000. While a $5,000 draw-down increase is small in comparison to a $50,000 profit increase, the futures should not be added, since it increases maximum equity draw-down by 20%. Adding more contracts of a futures already within the optimal portfolio with less risk may be safer than a risk increase of 20% for a gain of 10%. It is a little known, or understood, fact that some futures, within a system portfolio, may add up to four contracts and successively lower the maximum equity draw-down while profits are increased with each addition.

Having said all that, I have no idea what it means. Do you. All I did was answer the question. : )

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Sunday, 09 August 2020

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Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, and all of which can adversely affect actual trading results. For more information, see the Risk Disclosure Statement for Futures and Options.