With this post I want to share my thoughts about where I’m going next. Before starting a whole new system I need to think and consider what I have and  what I’m capable to do.  Every trading system starts with an idea. My idea this time: I need a system that provides me with a NON correlated return, thereby I further diversify my portfolio of trading strategies.
What’s my current portfolio of trading systems?
I’m a big believer in diversification, simply because it’s a cheap way to hedge your bets. Anyway, you can diversify in multiple ways:
- The time frame you are trading in: intraday, daily, weekly etc
. - How you trade: trend following, mean – reversion, pairs / market neutral, etc
. - What you trade: stocks, commodities, currencies, bonds etc
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You can further diversify what you trade by region, e.g. European vs US stocks. However, global equities have shown increasingly correlation over the last couple of years, especially US/Europe moved in tandem.
So let’s look at my portfolio of trading systems:
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Looking at the portfolio you see a big focus on equities at all. Furthermore my main focus has been the daily time frame with some adventures to intraday trading.
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So what are my options?
Over the last couple of weeks I’ve thought about my most likely options:
- Intraday trading:  Since I’m already familiar with the basic mechanics of the stock market that would be a natural extension. However I would need to trade on a fairly low time-frame, e.g. 5-10min in order to avoid to much correlation to my existing systems. My main hesitation to enter that ballgame is simply the fact that I’m concerned about my trade execution capabilities. I don’t think one can win in this game without a fully automated and to some extend co-located execution environment. Trading US equities Intraday I’m up to a battle with guys way beyond what I’m capable to do..
. - Commodities: Going into commodities I can stay on the daily time-frame, hence trade execution capabilities are less of an issue. I like to test systems with at least 10 years of history, but most commodities ETFs only have a couple of years history only. Â So developing reasonable commodities systems one need to use future based time series. Trading a diversified set of futures one needs to have a certain account size..
. - Currencies (FOREX): Also for currencies I can stay on the daily time-frame. Furthermore I get a reasonable long time-series, of at least 10+ years. All EUR based time series start 1999. The currency market is not as regulated as the US equities or futures market as most of the currency trades are OTC (over-the-counter) trades. So one needs to have a broker he/she can trust. Furthermore I like about the currency market that it can’t be regulated by any government. That’s of course MY European view, given the ever ongoing discussions about some kind of “special†European trading tax.
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For now I’ve decided to focus on a FOREX based system. I haven’t made up my mind if it’s mean-reversion or trend-following, one currency pair or a basket of pairs. Basically I’m starting from scratch. Stay tuned for more posts on this topic. Please let me know your opinion when it comes to system diversification and the pro’s and con’s!
– Frank
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