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In today’s episode, you’ll discover why you should adopt multiple trading strategies (if you’re looking to stay in the industry for a long time).
So listen to it now…
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Hey, hey, what’s up my friend? In today’s episode, I want to share with you why you should adopt multiple trading strategies.
Now don’t get me wrong, I’m not asking you to system hop, I’m not asking you to trade everything and anything, I’m not asking you to try everything out there like it’s a buffet – no.
Before we even get to that point, first and foremost, you must master one trading methodology, it’s like your bread and butter trading strategy, something that you have already found success with.
Once you have found success with that and you want to level up to the next stage of your trading career, then that’s when you might want to consider trading multiple trading strategies. Why is that?
Different trading strategies excel in different market conditions
Take for example trend following, it makes money during strong trending markets. Now, what about mean reversion trading? When does this type of strategy to make money?
Well, when the markets are wild and you have swings up and down, those are good market conditions for mean reversion trading strategies. And you see my point – different trading strategies excel in different market environments.
Here’s the thing, the markets are always changing. They go from a period of low volatility to high volatility, uptrend to downtrend, etc. This is why you want to adopt multiple trading strategies.
There are numerous benefits to it and let me explain to you what they are.
Benefit #1: You get to reduce your drawdown
Let’s say, for example, you are trading just one trading system and based on your historical backtesting or your own trading experience, the maximum drawdown is let’s say 40% maximum drawdown.
But let’s say you now trade two different trading strategies, and they are uncorrelated with one another. Let’s say one is in a 30% drawdown, while the other is up by 30% because they are uncorrelated.
Now if you combine the two of them, let’s say you allocate 50% of your capital to each of these two strategies, the overall drawdown of your portfolio (when you trade both trading strategies) will be 0% because one is down 30%, the other is up 30%.
So you’re pretty much at breakeven. This is what I mean by, you get to reduce your overall drawdown because of trading multiple trading strategies.
Benefit #2: Your returns are less lumpy
If you trade one strategy only, let’s say it’s a trend following strategy, and the markets go into a nice strong trend, your returns can spike up pretty quickly. But when the market stops trending, you can see that the returns collapse down equally fast as well.
That’s normal because the market conditions have changed. So your returns in a way it’s quite lumpy as it spikes up and down. But when you trade multiple trading strategies, which are uncorrelated with one another, your returns become much smoother.
Instead of going, up and down, it goes much smoother. So in a way, your portfolio value is growing at a much more steady pace. That’s what I mean by your returns will be less lumpy.
Benefit #3: Diversification
Here’s the thing, no matter how good your trading strategy or system that you’re trading, you simply have no idea when that system or strategy will break down or when you will enter a drawdown.
If you take Warren Buffett for example, as of now he is holding about 50 stocks out there. He is diversifying his capital into these 50 different stocks.
No matter how good he is as a value investor, no matter how much he scrutinized the balance sheet or the cash flow, he still diversifies his stock holdings, because he is never too sure.
Because that one stock that he buys might just collapse or go bankrupt because of certain reasons that he can’t foresee. And it’s the same for trading. When you trade multiple trading systems, you get to diversify your money across these different systems.
Some might not do well, some might do well, some system might go bonkers, but you might have some that you don’t do very well. So that kind of smoothens out your overall returns, your overall equity curve as well. Does that make sense?
How to discover new trading strategies or systems
Just a quick tip to share with you on how you can go about discovering new trading strategies or systems. The best way, in my opinion, is to read books, study webinars from traders who have a proven track record.
I like to study traders who like to share their ideas, their systems and who provide the backtest results because the hard work is kind of already done for me. All I need to do is to just tweak system they have shared to one that’s my preference and do the backtest to see how the results fair, whether it’s similar to what they’ve shared or not.
There’re a lot of books out there. If you want to learn more about trend following, you can study Stocks On The Move by Andreas Clenow or Trend Following by Michael Covel. If you want to learn about mean reversion trading, I think there’s one by Howard B Bandy, Larry and Cesar Alvarez, they have books on mean reversion trading as well.
There is a lot of stuff out there and it all depends on you how much you want to absorb.
Here’s a quick recap…
You want to trade multiple trading strategies because of a few reasons:
- Reduce your overall maximum drawdown
- Your returns will be less lumpy, your overall returns become much smoother
- You get the benefit of diversification because, at any one point in time, you’ll never know which strategies might do well and which might not
With that said, I’ve come to the end of today’s episode and I will talk to you soon.