No-one said to diversify in same asset class/high correlation instruments. Besides, that's not really diversification.
Being short is also a position. Gold did okay, complex positions like spreads can work irrespective of market trends. I won't even go into systems diversification which is key.
The Key to what? Diversification levels out the volatility of your investment portfolio. One asset class does well, another does poorly, the value of your portfolio doesn't have wide swings. But are you getting the best return on your capital? We are traders. Take what you can out of the market then stand aside and wait for the next opportunity. If there isn't an opportunity at the present time at least your capital is safe. Diversification doesn't mitigate risk, it mitigates volatility.
Key to much better performance, which lower vol offers assuming you employ any type of compounding. That was about systems diversification, not asset based but the same should hold. The idea is to take best opportunities where-ever they occur. Diversification offers better returns in the long run. Maximizing equity utilization at the same time. There's no prize for sitting on the sidelines unless your expectation is negative. For a simplified non-practical example -- if System1 takes trades only from Tuesday to Friday, I'd be looking at creating System2 that trades on Monday only. On top of this, for traders, it offers a cushion of safety because you can have a failing system without killing the portfolio.
I believe you are talking about taking what the market gives you. To me that is not diversification, that's common sense. When I think of diversification I'm thinking of owning or holding many stocks in a portfolio or having a variety of asset classes that hedge each other. I trade stocks. (One asset class so I'm not diversified) I'm either in a position or in cash. I'm not diversified , although I may own several stocks at one time. I have several set-ups that I will take when they present themselves but I don't consider that diversification.
That is diversification as well. If your approach is systematic and execution is religious, you can look at its equity curve as just another position. Besides you can diversify in one asset class as well. TSLA and SCI (cemetery management) have no correlation to speak of.
Once upon a time I would only choose mining stocks, like copper, iron ore, energy, lithium. Most of these are correlated to a degree, there would be times I could sit for weeks without buying. Also, when mining turned up, I would hit several stocks simultaneously with large size, this a type compensation for being flat for so long. I became uncomfortable with that method. Now I'll trade nearly anything that moves with a few exceptions, with much smaller size, more positions, not only is it more interesting, but it feels better, safer, and has improved returns.