Why Diversification Matters
Given that this thread has explored a particular trading approach that capitalises on any trending instrument and is not wedded to any particular market or asset class, it is now probably a good time to look at the subject of diversification and how these principles can be employed to make the most efficient use of available capital.
Rather than being focussed on any particular style of trading strategy (eg. whether it employs trend, swing, momentum or mean reversion principles) this thread will now spend some time examining the theory of diversification (whether in terms of diversification in instrument selection, system selection or timeframe selection) and how the theory can be applied to manage the correlation of expected returns delivered by a diversified approach and manage the equity curve.
Diversification in a nutshell allows for the most efficient use of available capital to increase overall system performance. This is attributed to the fact that when systems, instruments or timeframes are combined, each of which possess their own distinctive equity curve profile, it is possible using correlation assessments to combine these elements to produce a cumulative profile where a trader can enjoy the positive contributory benefits of each element to collectively magnify performance and at the same time dilute the combined drawdown of a diversified approach. The combined result allows for lower capitalisation that what would be required by an individual component and thereby increasing the overall rate of return.
What must be noted however is that diversification requires selective application as it is essential that the best results of each individual component are not diluted via carte blanche diversification. Rather the focus of methods of diversification are used to apply measures to simply 'plug the equity drawdown' or 'fill the gaps' of an equity curve to reduce the volatility of returns and lift the curve than could be achieved by a single component from summing collective positive performance.
.....anyway, it is time for a change in tack to the direction of this thread and a more in depth look at diversification as a method to improve performance is now warranted.
Rather than creating a new thread where the subject could lose it's context to the trend trading technique discusseed in this thread, I would like to continue a discussion on diversification methods and varying approaches within this thread context.
Looking forward to some robust discussions on the subject of diversification. When things slow down a bit for me at my primary work, I will be able to get into this in more detail, but thought now might be a good time to change the thread direction.
Regards
C
Given that this thread has explored a particular trading approach that capitalises on any trending instrument and is not wedded to any particular market or asset class, it is now probably a good time to look at the subject of diversification and how these principles can be employed to make the most efficient use of available capital.
Rather than being focussed on any particular style of trading strategy (eg. whether it employs trend, swing, momentum or mean reversion principles) this thread will now spend some time examining the theory of diversification (whether in terms of diversification in instrument selection, system selection or timeframe selection) and how the theory can be applied to manage the correlation of expected returns delivered by a diversified approach and manage the equity curve.
Diversification in a nutshell allows for the most efficient use of available capital to increase overall system performance. This is attributed to the fact that when systems, instruments or timeframes are combined, each of which possess their own distinctive equity curve profile, it is possible using correlation assessments to combine these elements to produce a cumulative profile where a trader can enjoy the positive contributory benefits of each element to collectively magnify performance and at the same time dilute the combined drawdown of a diversified approach. The combined result allows for lower capitalisation that what would be required by an individual component and thereby increasing the overall rate of return.
What must be noted however is that diversification requires selective application as it is essential that the best results of each individual component are not diluted via carte blanche diversification. Rather the focus of methods of diversification are used to apply measures to simply 'plug the equity drawdown' or 'fill the gaps' of an equity curve to reduce the volatility of returns and lift the curve than could be achieved by a single component from summing collective positive performance.
.....anyway, it is time for a change in tack to the direction of this thread and a more in depth look at diversification as a method to improve performance is now warranted.
Rather than creating a new thread where the subject could lose it's context to the trend trading technique discusseed in this thread, I would like to continue a discussion on diversification methods and varying approaches within this thread context.
Looking forward to some robust discussions on the subject of diversification. When things slow down a bit for me at my primary work, I will be able to get into this in more detail, but thought now might be a good time to change the thread direction.
Regards
C