Math and Statistics Behind Diversity in Trading Systems Portfolios

We discuss 3 strategies in our Stock Index Portfolio 11, looking specifically at the Micro Nasdaq 100 futures. We look at the difference between strategies that have 31% profitability, 47% profitability, and 62% profitability going back 3 years. These are not percentage returns but the number of trades out of 100 that are profitable.

This is based on a hypothetical backtest, using 3 years of data, for Micro Nasdaq futures day trading strategies with slippage and commission trading only one micro per strategy.

The goal of this video is to show how applying trading systems with different methodologies will generate different performance metrics that point to diversity in multi-strategy trading, which in turn can improve risk adjusted performance.

When the markets are volatile and have wide ranges, a strategy like Open Range has the potential to get in a trade where it can cut losses quickly if it is wrong or stay with a larger trend. It is wrong a lot but shows the largest dollar performance but has also had up to 17 losers in a row. Losing streaks can challenge trading psychology and the ability to adhere to a system.

When the markets have persistent trends, we can be incremental capturing smaller moves with a strategy like Viper that has a profit target that is closer to the entry than the stop loss with 62% winners.

V-Reversal captures mean reversion trades and is in the middle with accuracy in the 45-55% range. It has been one of our favorite strategies to day trade with the type of mean reversion price action we have seen intra-day.

We track how the equity curves perform differently at different times and the alignment of drawdowns with runups. We can't predict the future and when there will be a new regime. The market can be in a new regime before it is measurable in real time and before it would be realistic to have been able to measure the new regime and adjust the current trading strategy or methodology.

Using a diverse group of trading systems that work in different market environments where each individual strategy "won't do terrible" when it is not in sync while it has the tendency to "have an upward rising equity curve" when it is in sync with the market regime is the goal in portfolio development.

Additionally, when building portfolios, we like to combine different strategies of different methodologies that are at different points on their equity curve (some in runup, some in drawdown). The percentage profitability differences are just one way to quantify how methodologies can be different.