Why Use Multiple Systematic Strategies… and How Do You Backtest Them?

Diversification: Why Multiple Systematic Strategies Make Sense

For DIY Traders and Investors that have been in the markets for some time, there is usually a natural progression or variation of that progression that goes something like this...

1. Start trading with stocks.
2. Make some money then lose more money.
3. Try different instruments - maybe forex, futures, options, crypto etc.
4. Specialize in one or two different trading instruments/symbols.
5. Realize that in order to make money in markets, you have to manage risk properly on a per trade basis.
6. Realize that need more exposure to markets and more OPPORTUNITIES to trade in order to have more exposure and possibility of making money.
7. Realize that trading one or two instruments only doesn't allow managing of risk well.  And not enough opportunities, because one or two trading symbols might not be active for long periods of time.
8. Recognize that multiple trading opportunities and smaller position sizes make sense... the birth of PORTFOLIO trading!
9. Eventually, realize that ALL trading and investing strategies go through periods of performance, out-performance, then under-performance.  And all strategies, no matter what kind (discretionary or Systematic) go through periods of draw downs.
10. FINALLY REALIZE that the best approach to trading/investing is to exploit multiple Strategies which each exploit multiple opportunities... in order to get lower risk exposure to different market conditions, more opportunities = closer to stated edge and quicker recovery, smaller drawdowns (if done properly) and overall SMOOTHER ACCOUNT EQUITY CURVES.

As you can see in the below diagram, you have System #1 with better overall returns but much deeper drawdowns and more volatility.  System #2 has lower returns but less overall volatility and smaller drawdowns.  But when you combine both the systems (using a simple 50/50 allocation), the resulting equity curve is somewhere in the middle -- and benefits from the "best of both worlds".