CNBC Portfolio Challenge: Trading Begins Monday

Are you ready?

Before you answer, consider the fact that just because you participated in the previous contest and still have a valid CNBC.com login doesn't mean you've registered for this contest.

If you haven't already done so, go to the site and make sure you're able to create your 5 portfolios.  You need to do this anyway and it's a good way to make sure you're registered for the new contest.

Those of you who participating in our crowdsourced strategy last time around will recall the basic approach.  The idea is that, with hundreds of participating portfolios, we have an opportunity to play in a coordinated manner that gives us a significant leg up (while remaining fully within the bounds of the rules).  Each of us is using just one account (with up to 5 portfolios) and we're all trading on our own behalfs.

As discussed previously, the winners of large cash prizes will be the top scorers in the 2-week "finals" that follows the 10-week contest (this is a change from the summer rules, back to the 2007 rules).  20 players will compete in the finals with reset $1 million portfolios. Those 20 players will consist of the 10 top scorers overall and the 10 weekly winners.  Our crowdsourced strategy is significantly more useful at the weekly level than at the overall level, so that's going to be our primary thrust.  Last time, that meant we were primarily striving for the weekly prizes.  This time, it means any weekly winners will also advance to the finals and compete for the $800,000 in prize money.

We go for these weekly wins by viewing each week in isolation.  To embrace this strategy, you need to completely eschew your fear of incurring huge losses, because they're going to happen.  A lot.  The good news is that your score is effectively reset every week, since the weekly winner is determined solely by the percentage gain during that week alone.

If you choose to participate in this strategy, you can commit as many or as few or your 5 portfolios to it as you choose.  Of course, you can also choose to do your own thing completely and if you do, hopefully you'll still come around for the triva questions and to stay up to date on contest chatter and general market commentary and trading ideas.

Because there will be hundreds of thousands of competing portfolios, the only way to have a shot at winning a given week is to strive for as much volatility as humanly possible.  You need to learn to crave and lust after volatility in a very unnatural way.  And we're actually not terribly concerned about whether that volatility takes us up or down.  So long as things are swinging wildly (and assuming we're able to find trades on both sides of that volatility), then at least some subset of our collective portfolios should see big gains.  As long as some of our portfolios are up huge, we don't care that others are down just as huge (because 2nd place is just as useful as 100,000th place).  And if we can chase down and capture some truly reckless volatility 5 days in a row, then some sub-sub-sub-sub-subset of our portfolios will have managed to step through 5 consecutive days of enormous, compounding gains.

During the summer contest, the primary driver of market volatility was the price of crude oil.  We typically played this by investing half of our portfolios in oil companies (which tend to rise and fall with oil prices) and half in airlines (which tend to move in opposition to oil prices).

That was just a few months ago, but it's a gross understatement to say we've got a whole new market now.  Lucky for us, it's a ridiculously, unprecedentedly volatile market.  Even luckier for us, the new contest rules allow the use of exchange traded funds (ETFs). These are tradable vehicles that track either a stock index, a particular industry, a commodity, a currency, etc.  In previous contests, we were limited to single-company stocks, which exposed us to company-specific issues that tended to get in the way of our macro-volatility plays.  Better still, there exist some very special ETFs that behave like an underlying index, but are levered (up to 300%) to magnify the gains/losses.

These are ideal for our purposes and will play a major role in our attempt to grab those weekly bids in the finals.

You may recall that - because equity trades are only booked once a day, at 4 pm - every week effectively begins on the previous Friday.  You make your trades before 4 pm on Friday, those positions get added to your portfolio at the end of the day, and incur their first moves while in your possession on Monday.  Likewise, your Thursday trades (entered before 4 pm) are effectively your final trades of a given week.  But Week 1 is a little different. Since the contest doesn't formally begin until Monday at 9:30 am, it is effectively a 4-day week.  You'll make just 4 equity reallocations - before 4 pm on Monday, Tuesday, Wednesday, and Thursday.  (You'll also make a reallocation on Friday - but it'll only affect Week 2.)

With that in mind, you'll want to come back here on Monday - well before 4 pm. At that point, the specific ETFs to be picked up by any participating portfolios (however many of your 5 you choose to use) and the allocation methodology (who picks which) will be available.

Also recall that - unlike equity trading - currency trading is available continuously.  Like it or not, 1/10 of your portfolio is allocated to currencies and you can't transfer funds between the two accounts, so it's worth acquainting yourself with the currency trading tools and resources (including a practice account you can access now) on the contest site.

As with last year, trivia questions and answers will be posted throughout each day of the contest as they become available.  In addition to our primary initiative of winning those weekly spots, additional trading ideas and contest commentary will all be posted regularly.

Good luck and make sure to sign up for e-mail updates if you haven't already.

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Previously:  CNBC Million Dollar Portfolio Challenge Is Back

See all related posts in the CNBC Portfolio Challenge archive.

See older posts in the Summer 2008 - CNBC Portfolio Challenge archive.

Consider all of the above to be for entertainment purposes and not meant to be used as real-world investment recommendations.  The goals and strategies of the Portfolio Challenge are not to be confused with those of sensible investing.