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Diversification while Trading Futures?
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Diversification while Trading Futures?

  #1 (permalink)
Trading Apprentice
San Francisco + CA/USA
 
Futures Experience: Beginner
Platform: tos
Favorite Futures: futures
 
Posts: 8 since Dec 2012
Thanks: 9 given, 1 received

Diversification while Trading Futures?

I had an interesting few days. Instead of focusing on trading 1 market at a time like the ES, NQ, etc. I was trading 5 markets, 2 contracts each. Not all trades will go in my direction obviously but as the trades develop, I cut out the losers and manage the winning trades.

To me, I was using the philosophy of investors of diversification and taking it into the trading world. My risks seems to have lowered and at the same time increasing the chance of catching the big swings.

What are your thoughts on this?

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  #2 (permalink)
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  #3 (permalink)
Site Administrator
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Trendi View Post
I had an interesting few days. Instead of focusing on trading 1 market at a time like the ES, NQ, etc. I was trading 5 markets, 2 contracts each. Not all trades will go in my direction obviously but as the trades develop, I cut out the losers and manage the winning trades.

To me, I was using the philosophy of investors of diversification and taking it into the trading world. My risks seems to have lowered and at the same time increasing the chance of catching the big swings.

What are your thoughts on this?

You can't simply lower risk by trading more instruments. Did you watch the Ernie Chan webinar on Risk?

Webinar: Ernest Chan - Capital Allocation and Risk Management

But yes, a properly diversified portfolio is a much smarter play than leveraging up with a single instrument. I think it was pretty well explained in the above webinar.

You should also check out this thread:
https://futures.io/psychology-money-management/15602-risk-ruin.html

And:
https://futures.io/psychology-money-management/23249-webinar-ernest-chan-capital-allocation-risk-management-kelly.html

Mike

Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.

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  #4 (permalink)
Market Wizard
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Trendi View Post
I had an interesting few days. Instead of focusing on trading 1 market at a time like the ES, NQ, etc. I was trading 5 markets, 2 contracts each. Not all trades will go in my direction obviously but as the trades develop, I cut out the losers and manage the winning trades.

To me, I was using the philosophy of investors of diversification and taking it into the trading world. My risks seems to have lowered and at the same time increasing the chance of catching the big swings.

What are your thoughts on this?


After 20 some years of trading, I have come to the conclusion that diversification, done properly, is the closest thing to the Holy Grail that exists. You can get a smoother equity curve, and you don't have to rely on one trading method that may stop working one day.

The drawback is that it takes a lot more money to diversify, and Black Swan events (where everything becomes correlated for a while) can bite you really bad.

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  #5 (permalink)
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kevinkdog View Post
After 20 some years of trading, I have come to the conclusion that diversification, done properly, is the closest thing to the Holy Grail that exists.



Mike

Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.

Need help?
1) Stop changing things. No new indicators, charts, or methods. Be consistent with what is in front of you first.
2) Start a journal and post to it daily with the trades you made to show your strengths and weaknesses.
3) Set goals for yourself to reach daily. Make them about how you trade, not how much money you make.
4) Accept responsibility for your actions. Stop looking elsewhere to explain away poor performance.
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  #6 (permalink)
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To spread the risk over several instruments and strategies is really very helpfull. Due to the lack of an 2. strategy i can only share my experience with using the same strategy on several instruments. To make the story short i only measure the correlation of the DRAWDOWNS of every instrument. If the gains correlate - thats fine. Due to my pattern based approach my strategy don't depend from an trending or ranging market. If the backtested correlation of the drawdowns are too high i have 2 good options to incorporate the same risk: 1. Only use one instrument with full force or 2. utilize all instruments and split the position size. I prefer the 2. approach because i can add an equity curve based trade filtering and/or position sizing per instrument.

Koepisch

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  #7 (permalink)
Trading Apprentice
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Big Mike View Post
You can't simply lower risk by trading more instruments. Did you watch the Ernie Chan webinar on Risk?

Webinar: Ernest Chan - Capital Allocation and Risk Management

But yes, a properly diversified portfolio is a much smarter play than leveraging up with a single instrument. I think it was pretty well explained in the above webinar.

You should also check out this thread:
https://futures.io/psychology-money-management/15602-risk-ruin.html

And:
https://futures.io/psychology-money-management/23249-webinar-ernest-chan-capital-allocation-risk-management-kelly.html

Mike

Hi Mike!

Thank you for your input. Unfortunately I can't access the webinar because of my membership status.

Since you said "a properly diversified portfolio is a much smarter play than leveraging up with a single instrument," then why can't this same principle work during intraday trading?

Why can't you lower risk by trading more instruments at the same time?

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  #8 (permalink)
Site Administrator
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Trendi View Post
Why can't you lower risk by trading more instruments at the same time?

Example 1:

Trading 2 contracts on ES

Example 2:

Trading 2 contracts on ES
Trading 2 contracts on NQ
Trading 2 contracts on YM

In the second example, your risk is increased - not lowered. And it's certainly not diversified. You did not give specific examples of what markets you are trading, but you need to look at correlation and of course understand the total risk on the portfolio while all trades are on.

I said that a diversified portfolio is a good way to lower risk, but it is not as simple as just trading more products.

Ernie's webinar did an excellent job on this subject. I am not going to try to repeat what he said in the webinar into a post.

Mike

Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.

Need help?
1) Stop changing things. No new indicators, charts, or methods. Be consistent with what is in front of you first.
2) Start a journal and post to it daily with the trades you made to show your strengths and weaknesses.
3) Set goals for yourself to reach daily. Make them about how you trade, not how much money you make.
4) Accept responsibility for your actions. Stop looking elsewhere to explain away poor performance.
5) Where to start as a trader? Watch this webinar and read this thread for hundreds of questions and answers.
6)
Help using the forum? Watch this video to learn general tips on using the site.

If you want
to support our community, become an Elite Member.

Reply With Quote
 
  #9 (permalink)
Trading Apprentice
San Francisco + CA/USA
 
Futures Experience: Beginner
Platform: tos
Favorite Futures: futures
 
Posts: 8 since Dec 2012
Thanks: 9 given, 1 received


Big Mike View Post
Example 1:

Trading 2 contracts on ES

Example 2:

Trading 2 contracts on ES
Trading 2 contracts on NQ
Trading 2 contracts on YM

In the second example, your risk is increased - not lowered. And it's certainly not diversified. You did not give specific examples of what markets you are trading, but you need to look at correlation and of course understand the total risk on the portfolio while all trades are on.

I said that a diversified portfolio is a good way to lower risk, but it is not as simple as just trading more products.

Ernie's webinar did an excellent job on this subject. I am not going to try to repeat what he said in the webinar into a post.

Mike

Ahh I see how I failed to mention the instruments will increase risk yes. I traded...

CL
NQ
ZS
ZC
6C

I try to make sure the markets are not correlated so when I'm wrong, the results are not amplified.

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  #10 (permalink)
Freemason
Chicago, IL
 
Futures Experience: None
Platform: oil super computer
Favorite Futures: multiple
 
Posts: 193 since Jun 2011
Thanks: 595 given, 192 received


If you want a good read on correlation check out Schwager's interview of Ray Dalio in Hedge fund Market Wizards, while you might not think the instruments you are trading have much correlation they most likely do.

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