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Which futures markets to trade / faux diversification?
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Which futures markets to trade / faux diversification?

  #1 (permalink)
Trading Apprentice
washington, dc
Futures Experience: Advanced
Platform: TOS
Favorite Futures: futures
Posts: 3 since Jan 2013
Thanks: 4 given, 1 received

Which futures markets to trade / faux diversification?

Have not really found a good answer to this problem:

Diversification is fine and helps risk-adjusted returns. However, DIVERSIFICATION FAILS WHEN YOU NEED IT MOST. Correlations can run 0.5 to 0.7 in normal conditions, but as soon as markets start running, those same correlations approach 1.0 and even the most diversified portfolios, if on the wrong side of markets, can quickly fail, exceeding the expected losses of even well-backtested systems.

The best theoretical approach I've seen is Ralph Vince's work, which basically tries to backtest based on correlated maximum drawdown to arrive at optimal trade size. Theoretically, this limited trade size will not suddenly transform into a de facto overleveraged position when the time comes.

But this is more theory than practical.

How many markets should be traded, and, maybe give some examples of combinations.

Thanks in advance!!

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  #2 (permalink)
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  #3 (permalink)
Elite Member
Austin, TX
Futures Experience: Intermediate
Platform: Stage 5
Favorite Futures: Stocks
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Posts: 45 since Jan 2013
Thanks: 16 given, 23 received

IMO the amount of markets you trade should depend on your experience level I've traded stocks for 3 years and can watch/trade a list of 12-15 efficently but when I first started out I would only watch 2 stocks a little off topic from futures but I think you get the main idea. Now that I'm starting all over again with futures I'm personally only watching 1 market but plan to watch 3 eventually. Currently I watch the ES since its highly liquid and is generally traded by most people on the fourm but eventually once I get the swing of things I'd like to look at the CL and 6E. Also the markets tend to behave differently so it would also depend on your trading style... For example the CL sets up for huge moves in a short amount of time while the ES will muck around a bit in a range before it starts to move which would be good for scalpers looking to trade the extremes. I'm pretty new to this myself but just my .02

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  #4 (permalink)
Elite Member
Futures Experience: Advanced
Platform: TWS/SierraChart/Tradovate
Broker/Data: InteractiveBrokers/Tradovate/CQG
Favorite Futures: Bund (FGBL)
Posts: 114 since Jun 2013
Thanks: 181 given, 111 received

I basically trade almost every futures market, but the main markets I'm watching for daytrades are Index Futures, Energies, and Currencies. The other markets are more suitable for short-term trading IMHO. Also, if you trade a market make sure you know the fundamentals and the news of that market!

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