George_ Wilson

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What is portfolio optimization in trading?

Portfolio optimization is the process of allocating capital across different assets or strategies to maximize returns for a given level of risk. Traders use tools like mean-variance optimization, Sharpe ratios, and Monte Carlo simulations to find the best mix. For example, combining trend-following systems with mean reversion strategies can reduce drawdowns while improving overall performance. Institutions run complex models to allocate billions across equities, bonds, commodities, and forex. Retail traders can apply simpler principles, such as balancing correlated and uncorrelated pairs. The goal is stability, not just maximum profit. Portfolio optimization acknowledges that unmanaged diversification is not enough—capital must be allocated intelligently to improve risk-adjusted returns.