Trader's Roundtable

zehua · Contributing Member Joined: 01 Oct 2005 Posts: 8

We are unable to get a diversified portfolio. Sad

When EUR/USD is dropping, all of the other pairs are all doing the same.
Anyone could figure out a good portfolio in which any of the pairs are least corelated?

JAM · Posted: Tue Oct 04, 2005 3:09 pm Post subject:

For some reason this quote from William O'Neil came into my head: "Diversification is a good hedge for ignorance". In addition to where this quote comes from, I relay the thought this to my own testing and trading experiences - the most profitable FX trading systems I could discover were more profitable (with both better CAGR and MAR ratios) trading the USD crosses, and staying away from the non-USD crosses (ie EURGBP, EURJPY, GBPCHF, AUDCAD, etc).

Maybe I need to do some more testing, but then again, maybe not. If a system is profitable, and is profitable over many different time frames, why should I be so concerned?

I will keep testing in my ongoing quest for the holy grail, but until I find it, I am pretty happy profitably trading just the US dollar crosses.

Am I ignorant? Maybe, but I don't want to hedge away my profits by diversifying, either.

Just my $0.02.

zehua · Contributing Member Joined: 01 Oct 2005 Posts: 8

Well, when you lose in EUR/USD you may also lose in other USD pairs, resulting a large drawdown. That is bad. In this way you are taking too high a risk.
You should not only concern how much money you make, but also how much risk have you taken to make that money. Otherwise you won't survive long in this game. Very Happy

JAM · Posted: Wed Oct 05, 2005 2:26 pm Post subject:

I agree, the US dollar seems to be the biggest trender as of late - it rises, the EUR falls, and so goes the GBP, CHF, and to a lesser extent, the JPY...but with a trading system with a reasonable win/loss ratio and return ratio, a system trading correlated markets should still be pretty profitable.

I didn't mention anything about money management - that is the most important thing behind any trading system in my view. Knowing the correlation, and limiting the bet size, is my own way of working diversification.

In addition, although correlated, the USD crosses are not perfectly so - by so trading a number of crosses is in my view better than levering up on the EUR, by example.

zehua · Contributing Member Joined: 01 Oct 2005 Posts: 8

JAM · Posted: Wed Oct 12, 2005 7:18 am Post subject:

Okay, taking up the challenge then, I was playing with Trading Blox last night, and came up with two systems - ADX and DMA reversal systems - which trade upwards of 30 FX crosses, and provide (in my view anyways) marginally acceptable risk/reward profiles (CAGR > 30%, MAR > 0.50). Tightening up the signals, I can get the MARs up towards 1.0 in back testing, but I think they reflect too much data mining.

However, these systems still pale in comparison to other systems that I have tested trading just USD based crosses. Therefore, I am still predisposed do so, with the added benefit of greater liquidity/tighter spreads, but I am buying into your diversification arguement more, so I might throw some money at these more balanced systems instead...