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jcl
Registered: Jan 2012
Posts: 407 |
05-17-12 02:34 PM
Theoretically, it should be possible to make money even with a strategy that is not profitable. I don't mean selling it to newbies for $10000, but by using it in a compound system.
Suppose you have two uncorrelated strategies A and B, with A returning 80% profit and B 40% profit. A compound system of both strategies will not return 60%, but likely more than 100% - the whole is greater than the sum of its parts. I think this is commonly known. But surprisingly, this should even work when strategy B is slightly losing, f.i. -10%. As long as it has some negative correlation to the other strategies, adding it to a compound system can theoretically improve the overall return by reducing drawdown.
Has someone already made experiences with compound systems from uncorrelated or negatively correlated strategies and assets? What's the best money management for such systems - covariance based or optimal f?
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Soon2Bgreat
Registered: Apr 2006
Posts: 500 |
05-17-12 02:47 PM
m2c: Sure, it can be viewed as a cost of hedging and if it improves r/r, then that's great. That said, you should usually be able to find a similar strategy that provides the same diversification yet has a positive expectancy (or at least, not negative).
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HurricaneUS
Registered: Aug 2008
Posts: 754 |
05-17-12 03:55 PM
John Patrick's Regression System for gamblers can probably be adapted to trading in order to turn a 50% winning 1-to-1 risk-reward system profitable....
...working my way through his book as we speak...
Money Management for Gamblers
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nonlinear5
Registered: May 2006
Posts: 1059 |
05-17-12 04:19 PM
Quote from jcl:
Suppose you have two uncorrelated strategies A and B, with A returning 80% profit and B 40% profit. A compound system of both strategies will not return 60%, but likely more than 100% - the whole is greater than the sum of its parts.
Not sure how you derived this. By your reasoning, if I run the compound of two uncorrelated strategies A and B, which are both coin-flip types of strategies with the expectancy of each being correct is 50% of the time, my expectancy becomes greater than 50%?
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NetTecture
Registered: Mar 2009
Posts: 1010 |
05-17-12 04:43 PM
He is right, possibly - if the signals from winning strategy a happen mostly at the time strategy b looses a lot, it could be used as a filter, which may pull strategy b into winning territory. Something along those lines.
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