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Gerard Moore 06 / April / 20

The nature of trading systems and how it works


Diversification. Portfolio of trading systems
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We all know that the trading system is one of the components for making profit. The development of a trading system is quite a time-consuming task. After all, it must be in working condition 24 hours a day, 5 days a week. But there is one factor that makes any trading system useless in terms of profitability. These are market changes. And the trading system should be such that it can react to them with minimal losses. In fact, the trading system should contain the determining factors of market changes. 

But this is all a theory. Actually, there are no trading systems that bring high profits all the time. After all, it is impossible to predict when these changes will occur. Just as it is impossible to predict the future direction of the price. As usual trading systems bring profit from the ratio of 60 profitable deals to 40 losing ones. Such results are shown by an average trading system. Naturally, in terms of percentage profit, it is too little. And the negativity in trading adds the level of risk. It is undoubtedly high, because the percentage of loss-making orders is too large. Many traders are convinced that there are trading systems that lead to 100% profit. Some people are searching archives with trading systems around the clock, hoping to find the golden system. Some are trying to create it themselves. But, do not waste time on searching, because mankind has not invented such systems and will not invent them. It is better to pay attention to trading systems that show 70% profit. But even such systems are rare. In addition, if they show these results, it will not be long. I repeat, any trading system, at any moment, can become inoperable due to changes in the markets. But let's deal with trading systems, which work before the changes occur.

Any trading system has its own upper level of profitability

When trying to move above this level, the risk level increases, as the margin potential decreases. All this suggests that a trader can lose his or her deposit by relying on higher profits. But how to increase the profit, if one trading system, according to the trader, brings too low percentage of profit. The only way out is to add another one to this trading system. Not in the sense of interpretation of actions. Working on one trading system and using its signals, a trader can connect the second trading system as well. Now, instead of one trading signal, a trader will receive two trading signals. But there is one important point. Two trading systems should not be used as add-ons. In this case, they both become equally useless.

For example, there is one trading system that brings a relatively low profit. But instead of trying to fix something in it, to attract the second trading system. By doing so, we diversify the deposit. If one trading signal leads to a loss, the second one will slightly reduce the loss level. After all, watch how investors distribute their money. The money is distributed to different assets, and to different managers. In this case, if we get a loss on one asset, the second trading asset will either lead to a loss or profit. Of course, the profit in this case will be small, but it is better than losing some part of the deposit. It makes sense to make a portfolio of trading systems. There can be not two or even three trading systems in a portfolio. But they all imply trading on different trading instruments. Only in this way diversification becomes a full-fledged tool. What do you need to know when making up a portfolio of trading systems.

All of them should be different, starting with trading instruments and finishing with the type of analysis. For example, if one trading system is based on candlestick analysis, the second one should be based on technical analysis. The third trading system is based on the fundamental analysis. But what is characteristic, the correlation must either be absent at all or be insignificant. For this purpose, it is necessary to choose such trading assets, which do not have it. Then it is necessary to consider the level of profitability of each trading system by trading assets. After all, we know that each trading instrument implies a different level of profit. Oil can show one level of profit. A dollar, a completely different level. Shares, third profit level. But there is no doubt that the higher is the level of diversification, the lower is the probability of loss. That is, the more trading systems a trader uses, the lower is the risk of losing money. You should not hope for it. In any case, one trading system will bring losses. But this is just a working moment, nothing more. If this trading system will continue to show a low result of profitability, you will either have to revise the trading instrument with the subsequent transition to another one, or reduce the amount of investment in it.

 

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