Because both of you guys seem to be pretty good on this stuff, when adding systems, would you prefer to add a negativly correlated system, or a system with zero correlation? I could see the arguements for either.
Yeah, this post is pretty darn good. Whereas before I had been trading two highly correlated markets using different criteria for taking profits, I am going to have to give this concept a good hard look. Best Regards, JJ
I'd do the obvious thing: put together the various possible combinations, try them out, and see how they perform. Why rely on an opinion when you can get experimental results instead? (An opinion such as "Negatively correlated systems are always preferable to zero correlated systems" is just an excuse not to experiment, I believe.)
Touche. I'm working on creating systems to trade/add. I'm sure it also depends on what systems you have etc. I was looking for direction in what kind of system would be good to add on. I guess I will get to work on building one of each to see which works better!!!
What I've studied (theory) and what I've seen with years of screen time (real-time) is that the markets (all) work along the following paradigms (I've spent most of my time - 90%+ - with the financials, so I find this model is greatly applicable to them). Market Cycles Phase 1: Price Consolidation before Accumulation Long and Short strategies will work in this type of market. Phase 2: Accumulation Long strategies only will work Phase 3: Price Consolidation before Distribution Long and Short strategies will work Phase 4: Distribution Short strategies only will work ** (see diagram)
The market (Spooz) is currently in Phase 3, while the Longs are no longer working as effectively as they have been for several months, the market has not turned down just yet (see chart). A model such as you have described here (given sufficient work in development) would ideally be able to take advantage of all 4 phases of market action, experiencing losses only when price action becomes too choppy and range bound, so the entry signals of any trading system would also have to take that into consideration. Time to go to work. Best Regards, Jimmy Jam
I like "Things that work and make you happy are preferable to things that fail and make you unhappy." But you can feel free to experiment all you like to test that.
i would reduce the importance of correlation as a concept. the reason is that you add an additional layer of abstraction in the mid of your analysis and this layer kills some information without adding any. by this i mean that the whole markowitz efficiency frontier thing, where all this comes from, is better used as a financial marketing than a true investment tool. consider taking two equity curves. each has its own stats (return, std, draw downs bla bla). now you calculate the correlation and after that you take their stats and combine them by using the correlations. in principle it sounds fine, but it sucks since correlations consists of two very distinct parts for you as a trader. the positive correlation in good times does not make you worry at all. if the market is volatile and you make money on each day with your long break out and your short breakout strategy, each with a profit target, you LOVE that positive corr. actually i can cut this short. i do it as horri, i look at the strategies and see if their blend has better stats than the single strategies. you have a kind of corr-embedment by doing so.