Topic: Diversification

Hi,

Let's say we have 2 portfolio EAs for GBPUSD and EURUSD for 1H chart. Also, we know that EURUSD and GBPUSD are correlated because of their correlation coefficient.

Even if the two pairs are correlated both using 1H, does having a portfolio EA for each currency pair maintain its diversification status?

Is there a way to verify this?


Thanks.

Re: Diversification

Just because two pairs have high correlation, for e.g. EURUSD and GBPUSD, does not mean that an individual strategy or portfolio expert (even if trading the same one on both pairs) will have high correlation. Inversely, if two individual strategies or portfolio experts have high correlation it does not mean the underlying pairs they trade on have high correlation.

Examples taken from my own trading history over last 4 or so months (100 strategies).

The correlation between the strategies that trade on EURUSD to those that trade on GBPUSD is -0.11 despite EURUSD and GBPUSD having a high correlation. This is because the strategies that are traded on both are different, with different rules, stops, entries etc.

https://i.ibb.co/BqF1XVW/Capture.png

If we look at the positive correlation of those strategies, 104*** = EURUSD, 105*** = GBPUSD, we actually see that there is a bulk of correlation that occurs within EURUSD itself, not beween EURUSD and GBPUSD. I used positive correlation only for the colours because it was easier to format in Excel with conditional formatting. Negative correlation shows a similar result.

https://i.ibb.co/LnCggjX/Capture.png

This is a birds eye view of 300 strategies. It's hard to see but there is a white line that goes from the top left of the chart to the bottom right. The closer the groups of red are to this white line means that those strategies that trade on the same symbol are more correlated to each other as my magics grouped together and sorted ascending.

https://i.ibb.co/QfzFBS9/Capture.png

Don't take the above as gospel as these are my own results. Grouped into different blocks, added at different times etc.

It's due to these reasons that I believe correlation should be checked and accounted for on the individual strategy level, not the portfolio expert, or symbol level.

To answer your question, yes, you will have more diversification, but you need to be sure that the individual strategies are not correlated.

That being said, you need to be aware of your exposure across symbols.

Co-founder - Blue Capital Trading (https://www.bluecapitaltrading.com/)
Need help managing a portfolio of hundreds of trading strategies? Check out Strategy Samurai

Re: Diversification

Excellent post Burrup, love your illustrations whereby you backup your opinion with facts and findings.

Keep it up!

Cheers
Hannah

Re: Diversification

Thanks, burrup.lambert!

There is a function in settings for enabling diversification also.

It is obvious that individual strategies would have to be checked per portfolio.

Knowing that the diversification status from a forex pair level makes sense using a portfolio.

Thanks for the eye popping charts.