Maestro I'm a little unclear on what you are claiming Ashby proved. Different strategies applied to the same market or different markets? Do Ashby's finding conflict in any way with modern portfolio theory that pretty much encourages diversification to lower systematic risk?
No, what he is saying is if your risk is lower so is your return. Diversification does not change the risk/return ratio.
Maestro, personally, I'm not interested in changing the risk/return ratio. I simply want to combine the returns of multiple strategies in such a way that they offset one another during draw down periods. Obviously, if you combine two uncorrelated strategies into a portfolio that each return 1,000 pips. You get 2,000 pips from the total portfolio. And while one of them has a draw down of 250 pips and the other has a run-up of 150 pips, your overall draw down gets reduced to 100 pips. Isn't that right? Wayne
I think the point Maestro is trying to make is, if you are running a strategy on a market and its ratio is 1:1 and you are running an uncorrelated strategy on an uncorrelated market and its ratio is also 1:1, the over ratio of your portfolio is still 1:1. It doesn't matter how many strategies you run or how many markets you trade, the only way your overall ratio changes is if one of the strategies has a higher ratio. I could be totally wrong but thats what I am getting from he's saying.
So your interpretation of Ashby is that diversification is useless? Maestro since it seems you come from the field of psychology maybe you should look up modern portfolio theory.
That's the point of being uncorrelated--to reduce the chances of that happening. Of course, it's possible that will have some limited simultaneous drawdown. But, thinking logically, if one strategy wins during long trends, it will have some draw down when the trend stops even if you use ADX to filter some. In contrast, a channel strategy will do very well when the trend dies down but have a little draw down during trending times. So with uncorrelated strategies that also intrinsically have long draw down periods that are out of phase with each other, doesn't that reduce draw down? Wayne
May be I should. You never know. However, my argument was not about diversification being useless, but about diversification being useless for risk/reward ratio only. Since that was the original question I still remain certain that I am correct.
This conversation may be ratcheted up several notches. One needs to look at the opportunity and it is orthagonal to what has been discussed. Acrurary threw a long slow curve and finally his pitch changed, remarkably. He turned the corner at long last and headed in a very new direction. Of course we make money when price trends in one of three directions and the fractal shells of price movement can accommodate all three concurrently. Consider turning to making money, instead, as an important theme. In particular the application of capital to this purpose. What emerges is a cybernetics view of of market capacity, pace and volatility. This confluence allows one to take direction from the market to create to maximum diffrential capital flow out of the market per unit capital applied. All the while the markets deliver a flow of capital. This flow is has a rate and quantity of capital flowing which defines the market pressure inciting the metrics. None of you ,so far, measure any of this; that is the common manner of those in the financial industry. You may want to ask yourselves and others why quants do not do this either. Capturing this extraction potential also has it's subtulties. There is approximately half an order of magnitude more available than normal mathematics derives and this factor is most closely related to the harmonics issues. The context of the three part confluence is six dimensional as a portable time series. The objective of the math app is to determine certainty in a dynamic context. So far this conversational thread is just a warm up drill for the reality of extracting the potential of the markets. Take a look at what is being offered and try to get the picture in terms of capacity, pace and volatility for starters since those topics haven't come up yet. I would also add that the determination of long short or flat in a given fractal doesn't really break the ice as to what the actual spectrum of possibilities is. If the market action were divided into two classes, then they would be trending and reversion. Once you drop your three characterisitics into these three buckets, you get to see that each bucket is not full and one is shy of most of its ingredients. For example, I am trading 500 ES contracts (commonly seen on the T&S during the day); I decide to up the cars to improve my money velocity so I add enough to get to a half an order of magnitude. what is my strategy during odd harmonic turns? How to I modify it for even harmonics? How do I trade through the transition from odd to even? Now, lets look at bar overlap and volatility shifts on multiple fractals. Where am I in the pace distribution for each fractal? This post is not going to add to the conversation nor prolong it. It probably will be viewed as off topic. A lot is going to change in the next decade. If you look at the cultural shift around 1968 you can see how the months unfolded and the culture never went back. We are leaving the quant era and we are about two years into it. What replaces this layer in the history books is going to be remarkable. I am not referring to the "vultures" who have come in to harvest the dead meat of the carcasses nor sovereign capital positioning with equity dillutions; this is just the normal clean up crews at work. The main event is that the huge pools are game for anyone to move the capital from old pools into the new pools of the future. This movement out of the financial industry and into another industry, not yet ID'ed in the popular culture, is where the action is now seeded. When capital is being extracted at the capacity that the market allows, where do you think it goes? It certainly is not going back into that market; it is just being taken out continually. Making money is done by having an orientation to taking money out of markets. Its like taking oil out of the ground and using it somewhere else. After a while a peak is reached for extraction and then it is downhill after that. Some people make money and use it to go somewhere else and make more money using the money they have already made. Only so much new oil can be discovered to support the oil business. The financial industry is trying to find new money in the US, BUT you can take a look at where the billionaires live in Fortune and Forbes. So running 2500 contracts in ES is 2008's rough capacity. Look at running 20 contracts and pulling a few times the ATR each day; who is doing that? College students is one group. Where are these kids and people like them putting that money?