Benefits of Portfolio Diversification

Benefits of Portfolio Diversification | Using Multiple Asset Classes

So far in this series, we’ve talked about the benefits of portfolio diversification, what it is, market randomness and trying to protect against black swans.

Today we touch on another way to diversify your trading portfolio. This is to diversify across asset classes.

An asset class is a group of assets that have similar characteristics.

Examples of common assets classes are stocks and forex.

Examples of assets that make up these asset classes are Apple & Tesla (stocks), EURUSD and USDCAD (forex).

Potential benefits of portfolio diversification across different asset classes.

Each asset class will exhibit different behaviour, some of the time. By diversifying our portfolio across multiple asset classes, we can expect some assets to be going up, as others are coming down.

This can have a great benefit to the overall performance of the portfolio. If there is a crash in the stock market, you wouldn’t expect AUDJPY to fall off a cliff.

Similarly, if GBPCHF goes haywire, you wouldn’t expect it to negatively impact the S&P500.

Portfolio Diversification can help smooth out periods of drawdown and increase the risk-return ratio when using uncorrelated asset classes like in the examples above.

See how diversification benefits your portfolio on the Darwinex platform.

Darwinex provides a host of different metrics you can use to analyze various aspects of your portfolio.

For instance, under the assets and timeframes tab, it displays the percentage share each traded asset makes up of the portfolio.

These metrics can give valuable insight into the robustness of your portfolio.

Throughout this series, we have covered various insights into different ways of implementing diversification strategies into your trading strategy, both at a trade level and a portfolio level.

Diversifying across asset classes can be another great tool to utilize.

Yes, portfolio diversification is a tool. It’s a handy tool, but a tool nevertheless.

It’s up to the trader to decide if, when and where to use it.

When deciding upon which tools to use in your trading portfolio, always backtest to see what benefit it may provide.

Feel free to share some backtest comparisons of your undiversified and diversified returns on social with #darwinexchange.

Brought to you by Darwinex: UK FCA Regulated Broker, Asset Manager & Trader Exchange where Traders can legally attract Investor Capital and charge Performance Fees.

Risk disclosure:
https://www.darwinex.com/legal/risk-disclaimer


Content Disclaimer: The contents of this video (and all other videos by the presenter) are for educational purposes only, and are not to be construed as financial and/or investment advice.

portfolio diversification strategies

Portfolio Diversification Strategies | Practical Implications

How important is portfolio diversification?

When trading we will sometimes have to make sacrifices. There just aren’t enough hours in the day to do everything. We need to prioritize what we do effectively to gain the most benefit.

Depending on whether we are a discretionary trader or an algorithmic trader, will impact how you implement a portfolio diversification strategy.

Key considerations when implementing a Portfolio Diversification strategy

Time will always be a consideration. As discussed previously, diversification is an important component of risk management at the portfolio level, but it is not the ‘golden bullet’.

Portfolios need to be looked at holistically.

Where are our efforts best focused on at this time? It may be that your underlying trading strategy still needs work before you can benefit from implementing a diversification strategy.

Or it may be that your strategies are nice and robust, and you can now focus your time optimizing the portfolio risk side of things.

Ultimately, you’ll need to decide where your time is best served.

But how do I know what to do?

In the video, Martyn goes over some of his personal experiences with how he trades his portfolio of strategies. They don’t just provide you with great educational content, our presenters also trade the markets themselves. Where do they find the time!

Another consideration is how you trade.

Do you trade manually, or do you trade using automation?

If you’re a discretionary trader; your skill, and the number of monitors you have, may limit the number of assets you can manage at once. Again, your circumstances will dictate what works best for you.

A long-only, passive portfolio will need a different approach to diversification than that of a more active portfolio like the example in the video.

So, what can we take away from this?

We need time to implement what we know, and we need to know what to implement when we have the time.

Argh yes, the circle of life trading decisions.. 😌

Take a step back from your portfolio and look at it with a bird’s eye view. What is the most impactful thing you can do now that will help improve your trading?

Did you know we have a Slack group dedicated to trading?

Feel free to join here. We’d love to connect and talk shop.

If you’re new to portfolio diversification, consider reading this post to get some background on the topic.

Brought to you by Darwinex: UK FCA Regulated Broker, Asset Manager & Trader Exchange where Traders can legally attract Investor Capital and charge Performance Fees.

Risk disclosure:
https://www.darwinex.com/legal/risk-disclaimer


Content Disclaimer: The contents of this video (and all other videos by the presenter) are for educational purposes only, and are not to be construed as financial and/or investment advice.

MetaTrader Expert Advisors: The Set & Forget Myth [EAS-II]

Is Portfolio Diversification alone, sufficient for managing risk?

Portfolio Diversification is a critical consideration when managing the risk of a portfolio of trading strategies.

If you’ve watched the previous introduction to trading diversification video you’ll know how important it is.

However, it isn’t the only consideration 💡

We’re going to discuss some things to be aware of when looking into risk management techniques.

Here are two considerations where diversification might not work as well as one would hope:

1) Black Swans

It’s okay, you don’t need protection from Natalie Portman. A black swan is an “unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences”.

Can you think of an example of a black swan?

Tag us on Twitter (@Darwinexchange) with your thoughts, and if you’ve been the victim of a black swan event?

During these events, previously uncorrelated assets tend to become correlated due to unforeseen circumstances. This can reduce the effectiveness of this method of risk management.

2) Market Randomness

Regardless of how correlated two assets are. There will be times when both move in the same direction.

This temporary correlation doesn’t mean the same forces are driving them.

Due to the sheer quantity of assets and the nature of the financial markets, there will be a level of randomness to the price action. Thus reducing the effectiveness of portfolio diversification.

Ultimately, knowledge is power. By understanding areas where diversification may not be as effective, we can take steps to mitigate these risks. Reducing the risk on your portfolio is a multi-stage process.

Portfolio diversification is important, but it is only one aspect.

Hopefully, by the end of this series, you’ll feel comfortable implementing these valuable insights into your own portfolio.

Pop Quiz

If we diversify our portfolio across 4 uncorrelated assets, using the figures Martyn gives in the video, fill in the blank:

Diversification can only contribute to reducing the risk a max of __________% of the time.

Answers in the comments below!

The issues discussed here are just some of many that need to be considered when measuring risk.

Video Series: Why & How We Measure Risk differently at Darwinex

Watch the full playlist on YouTube here

Here’s video #1 where we describe the differences between Money Management and Risk.

Brought to you by Darwinex: UK FCA Regulated Broker, Asset Manager & Trader Exchange where Traders can legally attract Investor Capital and charge Performance Fees.

Risk disclosure:
https://www.darwinex.com/legal/risk-disclaimer


Content Disclaimer: The contents of this video (and all other videos by the presenter) are for educational purposes only, and are not to be construed as financial and/or investment advice.

darwin api

Introduction to Diversification | Reducing Risk by Portfolio Trading

Welcome to our latest content series on Portfolio Diversification.

It aims to provide a higher-level view of portfolio management ideas, rather than the specific indicators highlighted in the previous series Algo Trading for a Living.

We’ll kick things off with an Introduction to Portfolio Diversification.

Diversification is a really powerful tool for reducing the overall risk of your portfolio.

We’re going to look at the fundamental reasons diversification is an important part of any portfolio level trading strategy.

Firstly, what is “diversification” anyway?

We’ve probably all heard the saying ‘Don’t put all your eggs in one basket’; this refers to diversification.

In terms of finance, Portfolio Diversification is a term used to explain how trading portfolios can be constructed in a way that reduces the overall risk of the portfolio.

Diversification also smoothens drawdowns, in a way that is difficult to achieve by trading the components of the portfolio separately.

During this series, we’re going to look at four diversification techniques; starting in this video with a simple example using two uncorrelated FX currency pairs.

 

Which two FX pairs do you think we’re going to use?

Before watching the video, share your thoughts in the comments section below!

 

In the example, we discuss how to trade these two pairs as a mini-portfolio to help reduce the overall drawdown at the portfolio level.

Diversification is a technique that contributes to lowering the overall portfolio risk enabled by the trading of multiple; uncorrelated-techniques.

 

Do you trade any single-asset, systematic trading strategies?

Try doing some backtests on other uncorrelated assets.

Did you see any benefit from diversification? Let us know in the comments below!

 

Brought to you by Darwinex: UK FCA Regulated Broker, Asset Manager & Trader Exchange where Traders can legally attract Investor Capital and charge Performance Fees.

Risk disclosure:
https://www.darwinex.com/legal/risk-disclaimer


Content Disclaimer: The contents of this video (and all other videos by the presenter) are for educational purposes only, and are not to be construed as financial and/or investment advice.

Market Regimes | Algorithmic Trading

Market Regimes | Advanced Trading Techniques To Categorize Them

Why is it important to be able to categorize Market Regimes?

And what benefits can we hope to see from doing so?

Price action exhibits different characteristics in different market regimes.

Being able to classify the current market regime, allows us to adjust our trading rules to best suit the regime we’re in.

Thus allowing us to keep our trading edge, regardless of whether the market is trending or ranging.

It also allows us to filter our trades based on the current market volatility. Another important consideration when optimizing your trading rules for each market regime

If we use identical trading rules in each regime, we risk our algorithm losing its valuable edge, with the probabilities moving against us.

However, this technique does require careful consideration of statistical significance to avoid over-fitting, which is also explained in the video.

 

Brought to you by Darwinex: UK FCA Regulated Broker, Asset Manager & Trader Exchange where Traders can legally attract Investor Capital and charge Performance Fees:

Risk disclosure:
https://www.darwinex.com/legal/risk-disclaimer


Content Disclaimer: The contents of this video (and all other videos by the presenter) are for educational purposes only, and are not to be construed as financial and/or investment advice.

Amended Trading Hours Start of Daylight Saving Time 2021

Our trading hours are mostly based on New York time. The change to DST in the USA on 14 March means a temporary change in the opening and closing times for traders elsewhere.

Please see below our amended trading hours (*) for the two-week period between the change in the US from EST to EDT on 14 March 2021 and the subsequent change in the UK from GMT to BST on 28 March 2021.

Instrument Trading Hours in GMT
FX* 21:05 Sun – 20:55 Fri (except 21:59:50 – 21:04:01 daily)
DARWINS* 21:05 Sun – 20:55 Fri (except 20:59 – 21:05 daily)
COMMODITIES
XAUUSD* 22:01 Sun – 20:55 Fri (except 20:59 – 22:01 daily)
XAGUSD* 22:00:01 Sun – 20:55 Fri (except 20:59:50 – 22:00:01 daily)
XTIUSD* 22:00:01 Sun – 20:55 Fri (except 20:59:50 – 22:00:01 daily)
XNGUSD* 22:00:01 Sun – 20:55 Fri (except 20:59:50 – 22:00:01 daily)
INDICES
AUS200* 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
STOXX50E* 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
FCHI40* 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
GDAXI 01:30 – 21:00 (Mon – Fri)
SPA35 07:00 – 19:00 (Mon – Fri)
J225* 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
UK100* 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
SPX500* 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
NDX* 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
WS30* 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
US STOCKS* 13:31 -19:59 (Mon – Fri)

Please don’t hesitate to get in touch at info@darwinex.com should you have questions.