Reducing Trend Strategy Exposure in a Compressed Nasdaq Market
In this video, David Bean reviews one way to reduce trend-strategy exposure in a compressed Nasdaq market environment by modifying the Capstone 18 System Portfolio NQ.
The full 18 System Portfolio combines trend, counter-trend, mean reversion, and asymmetric trading strategies. We continue to like the diversification of the full portfolio over the long term, but different market environments can favor different combinations of strategies.
A Different Nasdaq Environment
Recent Nasdaq trading has featured persistent intraday compression and frequent back-and-forth price action. No one knows when that environment will change.
It could be driven by bond yields, crude oil prices, macroeconomic developments, the midterm election cycle, or another catalyst entirely. Eventually, larger directional moves will return, but the timing is impossible to predict.
That raises an important portfolio-management question:
Can we reduce some of the volatility of the 18 System Portfolio while the market remains compressed?
Comparing the 18-System and 11-System Portfolios
Using the Capstone Portfolio Metrics dashboard, we can compare the full 18 System Portfolio with an alternative version that removes seven primarily trend-oriented and asymmetric strategies.
The full 18 System Portfolio has historically generated approximately:
- $2.55 million in net profit
- $67,000 maximum drawdown
- $28,000 current drawdown
- 38.06 Profit / Max Drawdown
- $139.31 average trade profit
For traders focused primarily on long-term absolute gains and account growth, the full portfolio retains several of our preferred asymmetric strategies. These systems are designed to enter trades and allow larger trends to develop when market conditions support them.
Removing Seven Trend-Oriented Strategies
In the alternative setup, seven strategies are removed from the portfolio. Several of these are asymmetric systems designed to capture extended market moves, while others are more traditional trend-following strategies.
The resulting 11-system portfolio historically shows approximately:
- $31,000 maximum drawdown
- $19,215 current drawdown
- 47 Profit / Max Drawdown
- $146 average trade profit
The tradeoff is straightforward: lower historical net profit in exchange for lower historical drawdown and a higher Profit / Max Drawdown ratio.
Why Asymmetric Strategies Can Struggle in Compression
Asymmetric trading systems are generally designed to accept smaller losses while waiting for occasional larger winning trades. They can be especially effective when markets develop sustained directional movement.
However, in a market that repeatedly moves higher and lower without sustained follow-through, those strategies can experience more false starts.
That is the type of environment we have seen frequently in the Nasdaq recently.
By temporarily emphasizing mean reversion, counter-trend, and shorter-duration strategies, a portfolio may exhibit a smoother historical equity curve during these types of conditions.
Portfolio Flexibility Matters
One of the benefits of starting with a larger portfolio is the ability to evaluate different combinations instead of treating the portfolio as an all-or-nothing allocation.
With the Capstone Portfolio Metrics dashboard, users can turn individual strategies on and off and immediately compare:
- Net profit
- Maximum drawdown
- Current drawdown
- Average trade profit
- Profit / Max Drawdown
- Monthly returns
- Annual returns
This makes it possible to study how different strategy combinations have behaved historically and how portfolio characteristics change when trend, asymmetric, or mean-reversion systems are added or removed.
Explore Capstone Portfolio Metrics
The Tradeoff Going Into Q4
There is no guarantee that the current compressed market environment will continue.
We are entering Q4, and the current inflection points in interest rates, bonds, energy markets, and broader macro conditions could create much larger directional moves.
If that happens, the full 18 System Portfolio could benefit from retaining the asymmetric and trend-following strategies that are specifically designed to participate in those moves.
On the other hand, if the market continues to trade in a compressed and mean-reverting manner, the reduced 11-system setup may continue to exhibit lower historical volatility.
That is the core portfolio-management decision: accepting lower potential gains in exchange for historically lower drawdown and reduced trend exposure.
Explore the Capstone Portfolio Metrics Dashboard
The Capstone Portfolio Metrics dashboard allows traders to analyze strategy combinations, compare portfolio statistics, and evaluate historical drawdowns across different setups.
Rather than relying on a single fixed portfolio structure, users can test different combinations and better understand how each strategy contributes to the overall portfolio.
As always, historical and hypothetical results do not guarantee future performance. Market conditions change, and strategies that perform well in one environment may perform differently in another.
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