i often think diversification is not spreading risk , its almost totally ignoring it , having a more tunnel vision approach makes you deal with risk rather than adopt a more head in sand approach whereby you bury it by making it less significant , each to their own but my focus is excellence not mediocrity . I deal with my risk proactively and deal in instruments that arent subject to big gaps and are managable 24/5 . I am quite often 100% cash over weekends . Sure having a number of high probability systems will smooth the curve over a singular , but a singular system that gives a fast curve is where fortunes are made in quick time
How do you diversify your trades?
- Thread starter Sure Chap
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Buffet is wrong - the only protection against ignorance is knowledge.
In our business knowledge is a working method, no method - no knowledge, and diversification will not help.
To OP: what is the goal of diversification for the trader? Diversify between methods, how many do you have? Between markets - what for? Between time frames - why (you should concentrate on the ones that allow you to maximize your total profit)
Let me tell you something, paraphrasing old proverb: if you have one method it is already a lot.
So concentrate on developing the method. When (and if) you will get one by that time all ideas about diversification will be resolved.
Satisfaction guaranteed, or your money back...
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Diversification can or can not work. You could 'diversify' and trade 2 different instruments for example but if you have a true edge then it likely works on anything at any time and how is it different than just trading 2 x your size on just 1 instrument? It comes down to having a plan and following it. The problem comes when you get too complex I think that's when things get out of hand. In some TA threads here you see people coming up with 5 ways they categorize a market, such as trending, ranging, side ranging whatever, when in reality why classify it any more than in 2 ways as you can only bet up or down? Or like DBP was promoting trying to buy/sell every trend line break and test of extreme that occurs on a 1 min I mean that's just ridiculous. If you spend any time actually trading you will find that is preposterous.
Personally, I want to be a specialist in one futures contract, because you really don't need any other job if you're good at trading 5-10 lots on ES for example. I recently changed my trading method from counter trend to with trend and boy is it a world of difference and much easier. I only figured out how to define this thing in concrete about a week ago. I'm now +4 days in a row and any day I don't make money it's likely because there was no good trend (that's ok there's always tomorrow)... I only have every wanted 1 consistent setup and I can see from studying 3+ years of trades and charts I have from day trading that is all I will ever need.
Personally, I want to be a specialist in one futures contract, because you really don't need any other job if you're good at trading 5-10 lots on ES for example. I recently changed my trading method from counter trend to with trend and boy is it a world of difference and much easier. I only figured out how to define this thing in concrete about a week ago. I'm now +4 days in a row and any day I don't make money it's likely because there was no good trend (that's ok there's always tomorrow)... I only have every wanted 1 consistent setup and I can see from studying 3+ years of trades and charts I have from day trading that is all I will ever need.
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I'm speaking about systematic approaches so my focus on a particular day is irrelevant unless it's about execution mistakes.
No matter how focused or well designed a system is, there will be periods of DD or equity flat lining. To climb out of a DD with one system means you have to achieve greater returns to reach the previous peak. Another system that halves or reduces the DD even slightly will do wonders for the Sharpe and profit.
There's absolutely no reason why one "fast curve" system is better than 2. No one said for diversification you need to use mediocre signals.
There's little point to debate this. Plot 2 systems with good metrics and calculate the equity curve, then compare to the singular system. Diversification truly is the only free lunch in investing and trading.
One way to be diversified would be :
1 System Long Only & 1 System Short Only
Such as each P(G)*G cover the other P(H)*H.
The only risk left is choppy markets. Where both lose.
However I should read your answer rather than tell bullshit.
By the Way. Ray Dalio built an All Weather portfolio.
I Guess one can find his performance on the web.
Otherwise there is the barbell one by taleb.
Or you can by the S&P when VIX spike.
And you buy cheap OTM SPY puts.
With money, statistics and programming,
You can really have fun in this world.
1 System Long Only & 1 System Short Only
Such as each P(G)*G cover the other P(H)*H.
The only risk left is choppy markets. Where both lose.
However I should read your answer rather than tell bullshit.
By the Way. Ray Dalio built an All Weather portfolio.
I Guess one can find his performance on the web.
Otherwise there is the barbell one by taleb.
Or you can by the S&P when VIX spike.
And you buy cheap OTM SPY puts.
With money, statistics and programming,
You can really have fun in this world.
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IMO ........... Holding QQQ, DIA or SPY is enough diversification.
SPY and DIA correlation is 0.975 - amazing diversification.
Thanks, for the input guys. That is actually my plan I have one long term Vanguard account where I'll buy shares of VOO a etf that tracks the S&P 500 (essentially a cheaper SPY). On another account I'll trade the SPY, but I try to exploit the volatility. So far I've cut my loses a lot and I'm approaching profitability. I just need more time to see if my system works. I only trade one thing anything that tracks the S&P 500.IMO ........... Holding QQQ, DIA or SPY is enough diversification.
I eventually want to get into options/futures, but I definitely need a bigger account.