Traders' Roundtable

Does anyone have a view on the minimum number of markets a system should be able to trade profitably before you can call it a valid system? One I am playing around with returns great results on a portfolio comprised of swiss franc, yen, Nikkei225 index and 10 yr note. If I add other markets such as orange juice and copper results decline as the system is either marginally profitable or incurs losses in these latter markets. I realise that in optimizing a system it is best to do this over a number of markets so as to improve the validity of the indicators, I’m just not sure if having a system that works well over four seemingly diverse markets is enough. The high correlation between these markets also concerns me, even though the 10 year note has a strong negative correlation to the swiss franc.

Funny thing I was about to post an identical question.

I'm working on a system that is highly profitable on Nikkei 225, Hang Seng Index and FTSE 250. Using excel the correlation between the markets on a daily, weekly and monthly scale are between 0.33 and -0.33 for Nikkei/Hang Seng and Nikkei/FTSE250 but around 0.62 for Hang Seng/FTSE 250. I adjust position sizing to compensate for correlation. The idea is that if I am currently in a trade for Hang Seng Index and a signal for FTSE 250 shows up, the amount of equity risked is scaled down for the new trade. I need to do more testing to see if this is a "safe" thing to do.

Does anyone have any insights?

Peter

The price data might have low correlation yet the trading system equity curves might have high correlation. Since you've only got 3 markets "F", "H", and "N", it only takes a few experiments to test this out fully and completely.

Right now you are trading portfolio #1 below: (1/3) F, (1/3) H, and (1/3) N. You could test to see if its trading results are noticeably better than any of the other nine portfolios. If so then the equity curves have beneficial non-correlation. If not then you can trade fewer instruments without degrading performance.

1. F=(1/3) H=(1/3) N=(1/3)
2. F=(3/3) H=0 N=0
3. F=0 H=(3/3) N=0
4. F=0 H=0 N=(3/3)
5. F=(1/3) H=(2/3) N=0
6. F=(2/3) H=(1/3) N=0
7. F=0 H=(1/3) N=(2/3)
8. F=0 H=(2/3) N=(1/3)
9. F=(1/3) H=0 N=(2/3)
10. F=(2/3) H=0 N=(1/3)

Ted,

Thanks for your thoughts. It turns out that that particular market set is the minimium set possible while keeping the performance parameters within my required limits. Gives me a reference point as I add more markets.

Thanks

Peter