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How many strategies does one need?

  • #21
  • Sep 26, 2015 11:30pm Sep 26, 2015 11:30pm
Quoting Copernicus
{quote} Diversification (in systems or instruments or timeframes) are methods to manage the equity curve as opposed to being a performance solution in itself. For example, on a single system in periods of drawdown it ties down your capital and prevents you from taking other opportunities that may arise in other instruments/timeframes or systems. With a diversified approach, the principle of offset is applied to 'iron out the kinks in the equity curve' and plug the holes created by risk exposure using unrealised profits thereby releasing more available...
I don't quite understand why you are equating the currency market with stocks. In a well diversified portfolio if I'm not mistaken, the point of diversification is to mitigate risk while profiting from dividends. If you want to diversify in a retail forex platform then is your goal to profit on the roll over rates (carry trade)? in this scenario your transaction cost and the roll over rates you're paying need to yield positive returns for you, otherwise if you are looking to speculate on the movement of the pair, stick with one. When you take a position in different pairs, correlation between the pair will give you a position on the USD.
AVT INVENIAM VIAM AVT FACIAM
  • #22
  • Sep 27, 2015 12:12am Sep 27, 2015 12:12am
Quoting FerruFx
You're asking the wrong questions ... 1 strategy on 1 pair making 1 pip per day is enough to be profitable ...
  • #23
  • Sep 27, 2015 12:14am Sep 27, 2015 12:14am
Quoting kcarmack
Thanks guys! I'm trying to perfect one strategy and while it's not perfect, it's been profitable consistently as long as I don't deviate from it. I was just feeling like maybe it wasn't enough, but what I've been learning is that often in Forex, less is more.
Way to go

Be a Master with that 1 strategy
  • #24
  • Sep 27, 2015 12:16am Sep 27, 2015 12:16am
Quoting the redlion
{quote} I don't quite understand why you are equating the currency market with stocks. In a well diversified portfolio if I'm not mistaken, the point of diversification is to mitigate risk while profiting from dividends. If you want to diversify in a retail forex platform then is your goal to profit on the roll over rates (carry trade)? in this scenario your transaction cost and the roll over rates you're paying need to yield positive returns for you, otherwise if you are looking to speculate on the movement of the pair, stick with one. When you...
In a trend-following portfolio, diversifying a stake across uncorrelated or loosely correlated instruments tends to reduce equity volatility by increasing the likelihood of catching a proftable move.
  • #25
  • Sep 27, 2015 12:22am Sep 27, 2015 12:22am
Quoting Atokys
{quote} In a trend-following portfolio, diversifying a stake across uncorrelated or loosely correlated instruments tends to reduce equity volatility by increasing the likelihood of catching a proftable move.
we are talking about forex here right?

if you diversify into an inverse correlated currency... explain to me how you are not shifting your position on the USD + incurring transaction costs.
AVT INVENIAM VIAM AVT FACIAM
  • #26
  • Sep 27, 2015 12:25am Sep 27, 2015 12:25am
Quoting the redlion
{quote} we are talking about forex here right?
It applies to any currency or commodity instrument.
Quote
if you diversify into an inverse correlated currency...
That is not diversification.
  • #27
  • Sep 27, 2015 12:32am Sep 27, 2015 12:32am
Quoting Atokys
{quote} It applies to any currency or commodity instrument. {quote} That is not diversification.
here is my thought, perhaps I am wrong.

in the currency market we have the reserve currency of the world the USD, all other currency values are measured against the USD, so in essence either a currency is positively or negatively correlated to it.

now i stocks.... what is the point of diversifying a portfolio into a "trend following" portfolio ? either you're bullish or bearish on the market. You are still exposing yourself a systemic directional risk correct? if you diversify your portfolio in a perfect hypothetical way, then you will always be neutral, the profit comes from dividends.
AVT INVENIAM VIAM AVT FACIAM
  • #28
  • Sep 27, 2015 12:35am Sep 27, 2015 12:35am
One: Don't Lose Money.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #29
  • Sep 27, 2015 12:40am Sep 27, 2015 12:40am
Quoting the redlion
here is my thought, perhaps I am wrong. in the currency market we have the reserve currency of the world the USD, all other currency values are measured against the USD, so in essence either a currency is positively or negatively correlated to it.
The idea is to capture significant shifts in value of the underlying asset against the dollar.
Quote
now i stocks.... what is the point of diversifying a portfolio into a "trend following" portfolio ? either you're bullish or bearish on the market. You are still exposing yourself a systemic directional risk correct? if you diversify your portfolio in a perfect hypothetical way, then you will always be neutral, the profit comes from dividends.
Trend-following is a niche style of strategic investment and its approach to diversification is different from a traditional portfolio. There is no perfect way to diversify such a portfolio because correlations between instruments are always in a state of flux.
  • #30
  • Sep 27, 2015 12:45am Sep 27, 2015 12:45am
Quoting the redlion
{quote} I don't quite understand why you are equating the currency market with stocks. In a well diversified portfolio if I'm not mistaken, the point of diversification is to mitigate risk while profiting from dividends. If you want to diversify in a retail forex platform then is your goal to profit on the roll over rates (carry trade)? in this scenario your transaction cost and the roll over rates you're paying need to yield positive returns for you, otherwise if you are looking to speculate on the movement of the pair, stick with one. When you...
Hi redlion

I see where our lines are crossed here. No I am not talking about diversification in the sense of diversification within an asset class. By it's very nature the best forms of diversification in flattening the equity curve generally lie in diversification across asset classes. I participate in this forex forum but am not restricted by devoting 100% of my trading power in this restricted asset class.

Yes there is limited diversification potential within this asset class by trading un-correlated forex pairs (not negatively or positively correlated pairs), but there are other forms of diversification that you can apply when you are trading a distinct asset class itself such as system diversification (eg. trend following plus mean reversion) or timeframe diversification (eg. trading the short term medium term and long term etc.).

Within the equity market as an isolated asset class, diversification is also extremely problemantic by virtue of correlation that is embeded in this asset class. You don't see it in normal day to day trading but you do see intense correlation during alpha events (where all stocks turn red).

Within futures itself, correlation is not such an issue but I want to set my self apart from those funds that specialise in this sector and offer different performance benefits.

I have very little restrictions placed on how and where I trade as any liquid instrument has potential to assist the management of my equity curve. I am particularly selective in the ways I apply this principle as it is an effective form of risk management.

Furthermore if you are trading a fund as part of a broader portfolio of funds (eg. a fund of funds) the characteristic nature of the equity curve applicable to a single fund that for example restricts itself to a single asset class can be a big plus in attracting investors who are seeking a portion of the performance profile of your fund in their own portfolio construction.

There are reasons for this madness that are not isolated to simply being a retail trader trying to make their way in this forex game. It is an exceptionally tough game in isolation so I use methods to reduce my sole reliance on it. I hope that makes sense.

PS I am definately after alpha....not beta hence why I don't participate funds offerring simply beta. I do use them however as an approach to deliver alpha (outperformance).
  • #31
  • Sep 27, 2015 12:47am Sep 27, 2015 12:47am
Quoting Atokys
{quote} The idea is to capture significant shifts in value of the underlying asset against the dollar.
that statement tells me that you are still looking for positive/negative correlation ( assent/usd or usd/asset), why not pick currency/usd or usd/currency then and save the transaction costs?



{quote} Trend-following is a niche style of strategic investment and its approach to diversification is different from a traditional portfolio. There is no perfect way to diversify such a portfolio because correlations between instruments are always in a state of flux.[/quote]

I am not sure what this means, then buy an ETF or and Index that tracts the performance of the S&P... am I missing something?
AVT INVENIAM VIAM AVT FACIAM
  • #32
  • Sep 27, 2015 12:52am Sep 27, 2015 12:52am
Quoting the redlion
{quote} that statement tells me that you are still looking for positive/negative correlation ( assent/usd or usd/asset), why not pick currency/usd or usd/currency then and save the transaction costs? {quote} Trend-following is a niche style of strategic investment and its approach to diversification is different from a traditional portfolio. There is no perfect way to diversify such a portfolio because correlations between instruments are always in a state of flux. I am not sure what this means, then buy an ETF or and Index that tracts the performance of the S&P... am I missing something?
Yeah I think we are on different pages.

Heres an example of what I mean when it comes to diversifcation for a trading system:
Concentrating your trading risk in one currency vs USD offers less diversification than spreading your risk across a basket of different currencies vs the USD.
  • #33
  • Sep 27, 2015 12:58am Sep 27, 2015 12:58am
Quoting Atokys
{quote} Yeah I think we are on different pages. Heres an example of what I mean when it comes to diversifcation for a trading system: Concentrating your trading risk in one currency vs USD offers less diversification than spreading your risk across a basket of different currencies vs the USD.
by this statement you are still speculating on the value of the USD, I think what is not clear to me is your goal.
a basket of currencies will be more diversified as it pertains to the economy of a particular country vs The value of the USD, however if you are looking to profit on the direction of x/USD then a higher volatility currency would maximize your profits as it will increase your risk exposure. Do you agree that higher risk = higher potential returns? volatility will increase your risk exposure therefore it will increase your potential returns, when speculating on the direction (bear or bull)

if you want to decrease volatility of your position then in perfect environment where you have 0 volatility ... how would you profit if not by carry trade?
AVT INVENIAM VIAM AVT FACIAM
  • #34
  • Sep 27, 2015 1:03am Sep 27, 2015 1:03am
Quoting the redlion
{quote} by this statement you are still speculating on the value of the USD, I think what is not clear to me is your goal. a basket of currencies will be more diversified as it pertains to the economy of a particular country vs The value of the USD, however if you are looking to profit on the direction of x/USD then a higher volatility currency would maximize your profits as it will increase your risk exposure. Do you agree that higher risk = higher potential returns?
Yes, undertaking exposure to currencies that demonstrate more directional movement and volatility is essentially what such a system does.
Quote
volatility will increase your risk exposure therefore it will increase your potential returns, when speculating on the direction (bear or bull) if you want to decrease volatility of your position then in perfect environment where you have 0 volatility ... how would you profit if not by carry trade?
The goal is not to eliminate risk but to control your risk exposure to minimize your risk of ruin.
  • #35
  • Sep 27, 2015 1:06am Sep 27, 2015 1:06am
Quoting Copernicus
{quote} Hi redlion I see where our lines are crossed here. No I am not talking about diversification in the sense of diversification within an asset class. By it's very nature the best forms of diversification in flattening the equity curve generally lie in diversification across asset classes. I participate in this forex forum but am not restricted by devoting 100% of my trading power in this restricted asset class. Yes there is limited diversification potential within this asset class by trading un-correlated forex pairs (not negatively or positively...
you have very interesting thoughts here, so you add to your position (increase your risk exposure) when you see it advantageous whether be it intra-day or short/medium term, then scale back your investment to limit your risk.

if you are trading different asset classes and you are indeed out performing the market, that is great. I think that is what we all hope to accomplish.
AVT INVENIAM VIAM AVT FACIAM
  • #36
  • Sep 27, 2015 1:09am Sep 27, 2015 1:09am
Quoting Atokys
{quote} Yes, undertaking exposure to currencies that demonstrate more directional movement and volatility is essentially what such a system does. {quote} The goal is not to eliminate risk but to control your risk exposure to minimize your risk of ruin.
yeah, I apologize... I don't understand your position.

my opinion still stands then, for the OP trade one pair... the most liquid as you will incur less spread.
AVT INVENIAM VIAM AVT FACIAM
  • #37
  • Sep 27, 2015 1:10am Sep 27, 2015 1:10am
Quoting the redlion
{quote} you have very interesting thoughts here, so you add to your position (increase your risk exposure) when you see it advantageous whether be it intra-day or short/medium term, then scale back your investment to limit your risk. if you are trading different asset classes and you are indeed out performing the market, that is great. I think that is what we all hope to accomplish.
There are many different ways to manage exposure but essentially it involves undertaking risk to speculate on price movement and being out of the market when no such opportunities are present.
  • #38
  • Sep 27, 2015 1:13am Sep 27, 2015 1:13am
Quoting the redlion
{quote}... how would you profit if not by carry trade?
I see where you are coming from but one of the important features of diversification in flattening the equity curve is the ability to 'pound for pound' increase your trade frequency by reducing your capital exposure. The offsets provided by diversification (eg. one instrument going long and another instrument going short) reduces your margin allowing you to hypothetically get 2 trades for 1 with the same level of capital.

Another benefit IMO is what Atokys is talking about but the clash in mindsets occurs between the theory (what you are talking about) and the practice (what Atokys is talking about). Perfect correlation is a misnomer in markets with uncertainty and that uncertainty reflected by differences in price direction between instruments in the same asset class also assists in ironing out the kinks of an equity curve with multiple trades on the go, if you trade on the edges of the gaussian distribution such as with med-long range trend trading styles. :-)

The carry trade is using a known an undisputed real edge which is useful in itself, but an edge also results from trading with long term market consensus (IMO). Frequently I trade the trend on instruments that have negative swap and often these trades are the ones that actually deliver profit performance making me scratch my head and say WHY??????
  • #39
  • Sep 27, 2015 1:15am Sep 27, 2015 1:15am
Quoting the redlion
my opinion still stands then, for the OP trade one pair... the most liquid as you will incur less spread.
If the OP's goal is to speculate on that specific pair then yes.
  • #40
  • Sep 27, 2015 1:16am Sep 27, 2015 1:16am
Quoting Atokys
{quote} There are many different ways to manage exposure but essentially it involves undertaking risk to speculate on price movement and being out of the market when no such opportunities are present.

we are going around in circles here, if your conclusion is the above statement ... I don't think we disagree. The question is can you actually spot such opportunities.
AVT INVENIAM VIAM AVT FACIAM
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