Improving Net Profit-to-Max Drawdown Without Increasing Portfolio Risk

How can you improve a trading strategy portfolio’s Net Profit-to-Max Drawdown ratio without increasing risk or simply resetting the portfolio at an equity peak?

In this video, I walk through a real portfolio analysis using our Portfolio Metrics Tool and show how we evaluate strategy redundancy, correlation, current drawdown, maximum drawdown, average trade profit, and overall portfolio efficiency.

The specific example uses our 18 System Nasdaq Portfolio. Rather than simply adding another strategy or increasing position size, we evaluate whether several strategies are providing genuinely different sources of return or whether they are creating unnecessary overlap.

Improving Efficiency Instead of Simply Adding More Strategies

One of the challenges in multi-strategy portfolio design is that more strategies do not automatically mean better diversification.

Two or three systems may use different entry rules while still responding to the same underlying market behavior. If they tend to enter around the same time and profit from the same type of directional move, they can create hidden correlation inside the portfolio.

In this analysis, we examine several strategies with similar exposure around the Nasdaq opening range. The objective is to determine whether a more selective strategy can replace multiple overlapping strategies while improving the overall portfolio statistics.

The Starting Portfolio

The 18 System Portfolio was released in May 2025 and the results establish approximately 16 months of out-of-sample performance.

Before making any changes, the portfolio has a Net Profit-to-Max Drawdown ratio of 40.72.

The portfolio is also already in a significant drawdown cycle. That matters because we do not want to make a portfolio look better historically by effectively resetting it at a new equity peak and ignoring the risk already embedded in the current portfolio.

Instead, we want to ask a more practical question:

Removing Strategy Redundancy

We begin by reviewing the individual strategies inside the portfolio and identifying systems that may be underperforming or providing exposure that is already represented elsewhere.

One strategy, VSD Trender, has underperformed. Removing it improves the portfolio’s Net Profit-to-Max Drawdown ratio.

We then examine NQ Pulse and the portfolio’s Open Range strategies.

These systems do not necessarily enter at the exact same time or price, but they can share a similar trading philosophy around the market open. In volatile and choppy opening environments, that overlap can become more important.

Consolidating Three Strategies Into One

The analysis ultimately shows that three similar trend-based strategies can be consolidated into one more selective strategy.

After the modification, the portfolio moves from approximately 18 systems to 16 systems.

More importantly, the historical Net Profit-to-Max Drawdown ratio improves from:

At the same time, the portfolio remains approximately the same distance from its historical maximum drawdown.

In the example shown in the video, the remaining distance to the historical worst-case drawdown is approximately $7,400.

That is an important distinction. The improvement is not simply coming from assuming substantially more risk.

Why Current Drawdown Matters

Portfolio optimization can become misleading if every change is evaluated only from a fresh historical equity peak.

A live portfolio already has a position within its historical equity curve. If the portfolio is currently in drawdown, replacing several systems with completely new strategies can effectively create a new portfolio whose full historical drawdown risk has not yet been experienced.

That is why we evaluate both:

• Historical maximum drawdown
• Current portfolio drawdown
• The remaining distance between the two

The objective is not merely to find the most attractive historical performance curve.

The objective is to improve the portfolio while preserving a realistic view of its current risk position.

Metrics We Evaluate

The Portfolio Metrics Tool allows us to evaluate the portfolio from several different perspectives, including:

• Net Profit / Max Drawdown
• Current Drawdown vs. Historical Max Drawdown
• Strategy redundancy
• Strategy correlation
• Open-range strategy exposure
• Average Trade Profit
• Individual strategy contribution
• Portfolio-level diversification

Markets Change, So Portfolios Need to Be Monitored

The original 18 System Portfolio was developed in May 2025. Since then, Nasdaq price levels, volatility, opening ranges, and intraday behavior have continued to evolve.

We do not believe portfolio management should mean constantly changing strategies based on the most recent winning or losing streak.

But we do believe in periodically evaluating whether the portfolio still contains genuinely independent trading ideas or whether certain systems have become unnecessarily redundant.

The goal is to remain proactive without simply curve-fitting recent performance.

Portfolio Metrics Tool

We are continuing to develop our Portfolio Metrics software to make portfolio analysis faster and easier.

The objective is to allow traders to import strategies from platforms such as TradeStation, NinjaTrader, and MultiCharts, combine those strategies into custom portfolios, and evaluate the resulting portfolio-level performance and risk.

This can also allow traders to combine their own strategies with other systems and evaluate the complete portfolio rather than analyzing every strategy in isolation.

Futures trading involves substantial risk and is not suitable for every investor. Historical or hypothetical performance does not guarantee future results. Portfolio modifications shown are presented for research and educational purposes.