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Portfolio Diversification | Using Multiple Trading Strategies to Diversify your Portfolio

In the last few videos, we’ve covered a range of ways to help diversify your portfolio.

Namely

  • Diversification between asset classes
  • Diversification within the same asset class
  • Diversification across timeframes

Today we want to look at Diversification across trading strategies.

But first, let’s take a step back and think about why we want diversification in our portfolio? As traders, we need to decide how best to get to the desired outcome.

We want to maximise our returns, but also minimise our risk. If we take zero risk, it’s fair to assume we can expect zero return. We need to decide what we’re willing to risk to get the returns we want.

By using some of the techniques above we can look to fine-tune our strategy to do just that. You may have noticed in the examples in the videos, that the returns of some of the individual strategies before diversification are higher than the diversified return.

We’re not looking to chase absolute returns. That’s not the point here. In all the examples the risk-return ratio has been higher on the diversified portfolio. We’re sacrificing a little return, for less risk.

I like to think of an old gambling saying I used to hear ‘you need to bet to win money, but you need money to bet.’ If you lose 50%, you must gain 100% to break even. By fine-tuning the risk-return ratio you are better equipped to speed up recovery in the event of a large drawdown.

As traders, we must decide if the trade-off, of lower returns but a higher risk-return ratio is more appealing to us than absolute returns.

Do you think that diversification is a good idea?

 

Can you diversify your portfolio too much?

Two things can mitigate some of our diversification strategies. Black Swan events and market randomness. That’s why it’s so important to diversify your portfolio properly, to fill in the gaps and reduce the effect of these.

The Darwinex platform has a tonne of trading metrics that both the trader and the investor can benefit from. Even just the description from the trader can provide some good information about the strategy.

You can even import your trading history from another broker and then use our trading metrics to analyse your strategy and compare it to some of our Darwin’s.

If you aren’t yet familiar with DARWIN assets, think of them like ETFs or Mid-Cap Stocks.

Just like an ETF could track the performance of the S&P500, a DARWIN is a financial asset that tracks the performance of a trader’s underlying trading strategy, in real-time.

Darwinex manages the risk of investments in DARWIN assets independently of providers, ensuring that they carry a monthly maximum target VaR (95%) of 6.5%.

Our FCA Regulated Asset Manager charges performance fees on investor profits (20%) on a high-water mark basis, paying 75% of them to Providers.

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 | Across Timeframes

Portfolio Diversification concepts are one of the most flexible tools you can use to improve your trading strategy. So far, we have looked at the benefits across multiple asset classes and within the same asset class.

There is also another way to implement Portfolio diversification concepts into your trading.

Is it possible to follow the same principles of Portfolio Diversification concepts across timeframes?

Let us see.

There are multiple ways to successfully introduce diversification into your portfolio.  It will not be appropriate to implement them all.

This is because we need to understand how each one affects the risk-return ratio of your portfolio.  We do this in order to increase the robustness of the trading strategy.

A simple and effective way to see if diversifying across timeframes would benefit you, is to use your existing strategy and change the timeframe.  It could be something that simple; Sounds too good to be true, doesn’t it?

For example, if your existing strategy trades the H4 timeframe, run some backtests on the 15m and see what effect it has.

The power of algorithmic trading is, once your strategy is automated, it’s easy to backtest across multiple timeframes and assets.

Keep in mind, the higher frequency your algo trades, the more costs you will pay.  For example; if calculations are based on trading x1 per day, if you add a strategy that increases frequency to x3 per day, it will increase costs x3 too.

Investors on the Darwinex platform can use platform metrics to see if the Darwin they’re interested in,  trades multiple timeframes. Keep watching until the end to see how.

Algorithmic trading allows you to efficiently test multiple ideas across multiple assets, asset classes and timeframes. Finding a way that does not work gets you one step closer to finding a way that does.

How do you use algorithmic trading to improve your time efficiency?

Tag us on Twitter (@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.

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.