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I had an interesting few days. Instead of focusing on trading 1 market at a time like the ES, NQ, etc. I was trading 5 markets, 2 contracts each. Not all trades will go in my direction obviously but as the trades develop, I cut out the losers and manage the winning trades.
To me, I was using the philosophy of investors of diversification and taking it into the trading world. My risks seems to have lowered and at the same time increasing the chance of catching the big swings.
What are your thoughts on this?
Can you help answer these questions from other members on NexusFi?
But yes, a properly diversified portfolio is a much smarter play than leveraging up with a single instrument. I think it was pretty well explained in the above webinar.
I'd like to start a discussion on Risk of Ruin. The general concept of a Risk of Ruin analysis is to determine if you will go bust over a statistical number of trades. For example you may have a probability edge of 65% but after factoring commissions, …
It is my pleasure to announce that Ernest Chan from QTS Capital Management LLC will be here on Wednesday, January 23rd @ 4:30 PM Eastern US. Yes, yes, I know the date is far off - scheduling is sometimes difficult.
After 20 some years of trading, I have come to the conclusion that diversification, done properly, is the closest thing to the Holy Grail that exists. You can get a smoother equity curve, and you don't have to rely on one trading method that may stop working one day.
The drawback is that it takes a lot more money to diversify, and Black Swan events (where everything becomes correlated for a while) can bite you really bad.
To spread the risk over several instruments and strategies is really very helpfull. Due to the lack of an 2. strategy i can only share my experience with using the same strategy on several instruments. To make the story short i only measure the correlation of the DRAWDOWNS of every instrument. If the gains correlate - thats fine. Due to my pattern based approach my strategy don't depend from an trending or ranging market. If the backtested correlation of the drawdowns are too high i have 2 good options to incorporate the same risk: 1. Only use one instrument with full force or 2. utilize all instruments and split the position size. I prefer the 2. approach because i can add an equity curve based trade filtering and/or position sizing per instrument.
Thank you for your input. Unfortunately I can't access the webinar because of my membership status.
Since you said "a properly diversified portfolio is a much smarter play than leveraging up with a single instrument," then why can't this same principle work during intraday trading?
Why can't you lower risk by trading more instruments at the same time?
Trading 2 contracts on ES
Trading 2 contracts on NQ
Trading 2 contracts on YM
In the second example, your risk is increased - not lowered. And it's certainly not diversified. You did not give specific examples of what markets you are trading, but you need to look at correlation and of course understand the total risk on the portfolio while all trades are on.
I said that a diversified portfolio is a good way to lower risk, but it is not as simple as just trading more products.
Ernie's webinar did an excellent job on this subject. I am not going to try to repeat what he said in the webinar into a post.
If you want a good read on correlation check out Schwager's interview of Ray Dalio in Hedge fund Market Wizards, while you might not think the instruments you are trading have much correlation they most likely do.