I can't understand why diversification across uncorrelated strategies should not work. Suppose you have a rigged coin. 60% chance of heads and 40% chance of tails. Let's define "heads" as profit, and "tails" as loss. So by tossing this coin sooner or later you will be in profit (more heads than tails). It's just a matter of time (number of tries). The probability of being in profit after 20 tries is bigger than after 10 tries, right? Coin tosses are independent. Let's say we toss a coin 20 times a day. Take the first 10 and label them "strategy A", then the second 10 and label them "strategy B". The results of these two strategies will be uncorrelated, i.e. the strategies are uncorrelated. Now if you played only one strategy (A or B), you would get to toss a coin 10 times a day instead of 20, and the probability of you ending the day in profit will be lower. So how did that guy proved this does not work?
countless examples can be given on this risk/reward and smoothness issue. for instance think that you are betting on a rigged coin flip, chances are 1/3 that you loose all your money and 2/3 for doubling it. if you bet all your money on one coin flip, the chances of facing losing all your money is 1/3 . if you diverse your money on betting 4 coin flips, this chance is reduced to 1/81. if this what you aim to do, then there is no problem, your strategy will work. there always can be unexpected events that can affect our investments, and by dividing our money on several investments we can reduce effects of this unexpected events. since we can't know everything, that our investments are affected by, in my opinion what greaterreturn has suggested is a wise thing to do, especially in times of uncertainties.
actually it is the opposite with me, it adds to the unclear picture of what you are trying to bring across. if i have a trendFOLLOWING strategy in the sp500 and a trendFADER in the DowJones and we have a sudden move in both of them, then one strategy triggers a long and the other a short. if the two indices move on in the same direction i win with one, i lose with the other. so the ONLY thing i care about is strategy correlation. the underlying market corr does not tell anything, unless we are talking only about very similar strategies in the first place.
Yes, this thread was originally started to discuss Alan's ideas. With this in mind, when people are talking about correlation, it's correlation among results of strategies, that enter long and short trades at different times, implement stop losses and other trade management techniques. Which is a lot different than correlations among price data series of different markets. But I would probably be wrong to assume that Maestro does not understand this.
I definitely understand the difference. My point was related mostly to the multiple strategies scenario. However, correlation between the strategies usually stems out from the correlation of the data they are running on.
Exactly, all we need now is the definition of the positive expectancy of correlated and noncorrelated confusion .After that all is just a walk in the park .
maestro (btw a great name. it is like talking to someone standing on a podium ...) i sense where you are coming from. yet i think in futures the additional sharpe outweighs the cost of leverage by far IMO. and i think this cost of additional leverage is what your argument boils down to ... one point comes to mind on the overall topic: if it is not nonCorrelated strategies, what the hell is a systemdeveloper looking for once he has something already trading?