A basket of uncorrelated systems is a good way to protect against a drawdown in any single system, but it doesn't affect the risk issue. Whether you trade one pair/stock/contract or a basket of them, you still need to control your risk on each trade. If you don't have any discipline and you let trades get away from you -- "I'm sure the market will turn soon, I'll hang on a little longer" -- then any one trade can do huge damage to your account.
I believe in understanding and characterizing my trading systems very carefully. I look at the history of trades -- either live trades or a backtest -- and observe the patterns of wins & losses. Based on the #/size of wins vs. losses, you can tell how much is safe to risk on a trade. Risk too much, and you can turn a winning system into a loser. Extreme example: heads you win $2, tails you lose $1. That's a huge winning system, with an expectation (average trade) of $0.50 per coin flip. So you say great, I'll bet 100% of my account! And then you get tails, and you're busted. 100% was too big a risk. The "optimal" bet size can be calculated as AverageTrade / AverageWin, which is $0.50 / $2.00 = 25% in this case. Betting less OR MORE than 25% will produce lower profits. But that "optimal" level will have huge drawdowns, like 90-95%, on the way to making the "optimal" profit. Trading at 1/10 to 1/4 of the "optimal" level is a lot safer and a lot less likely to drive you to jump off a bridge!!
So if you're trading a basket of pairs/systems and your "optimal" bet size (called the Kelly value) is 25%, then you might risk 2.5% (Kelly/10) on EACH trade.
I believe in understanding and characterizing my trading systems very carefully. I look at the history of trades -- either live trades or a backtest -- and observe the patterns of wins & losses. Based on the #/size of wins vs. losses, you can tell how much is safe to risk on a trade. Risk too much, and you can turn a winning system into a loser. Extreme example: heads you win $2, tails you lose $1. That's a huge winning system, with an expectation (average trade) of $0.50 per coin flip. So you say great, I'll bet 100% of my account! And then you get tails, and you're busted. 100% was too big a risk. The "optimal" bet size can be calculated as AverageTrade / AverageWin, which is $0.50 / $2.00 = 25% in this case. Betting less OR MORE than 25% will produce lower profits. But that "optimal" level will have huge drawdowns, like 90-95%, on the way to making the "optimal" profit. Trading at 1/10 to 1/4 of the "optimal" level is a lot safer and a lot less likely to drive you to jump off a bridge!!
So if you're trading a basket of pairs/systems and your "optimal" bet size (called the Kelly value) is 25%, then you might risk 2.5% (Kelly/10) on EACH trade.
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