How To Build A Diversified Portfolio Of Trading Strategies (Why You Need It As A Trader) – [Two Examples]
A portfolio of trading strategies
You need to build a portfolio of trading strategies that differ in markets, time frames, and types. Why? Because you want to have a portfolio of trading strategies that both complement each other and make the portfolio diversified and uncorrelated. In order to do this, you preferably need to test and simulate on a trading platform.
The most important task of a quantitative trader is to find trading edges and subsequently turn them into good stand-alone strategies. However, many traders neglect to test how those strategies perform together as a portfolio of strategies. Just as a long-term investment manager puts together a portfolio of stocks, a short-term trader needs to evaluate how the strategies perform together as a portfolio.
An investor doesn’t compose a portfolio or basket of only oil stocks. The investor looks for stocks that both diversify the portfolio and complement it. A trader needs to have the same mentality.
It’s impossible to predict the future value of a stock, and likewise, it’s impossible to know the future predictive power of a quantified trading strategy. This is the reason why you want to have a portfolio of many strategies.
Some strategies will gradually deteriorate, some might blow off spectacularly, and others perhaps perform much better. You need to diversify your strategies just as you diversify your stock holdings.
Perhaps you need ideas for strategy development?
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