Why You Should Trade more than one Trading System

Recently I received the following question: “You suggested that we should have 2 or 3 systems to trade. Why?”
Trading more than one system smoothens your equity curve. You should at least trade 2 systems: A trend following system in a trending market and a trend-fading system in a non-trending market.
Take a look at the following example.
Below you see an equity curve of our trend-fading system CoinCollector for the e-mini S&P:

Because of its characteristic the system does not perform very well in trending markets. That’s when you see the dips in the equity curve.
If you combine this system with a trend-following system for the e-mini DOW, you receive the following equity curve:

The equity curve looks much smoother.
Now let’s take a look at some performance measures:

MeasureCoin CollectorCoin Collector
and DOW
Difference
Net Profit$23,200$28,955+ 24.80 %
Average Profit per Trade$37$36– 0.97 %
Max Drawdown$1,963$1,688– 14.00 %
Profit Factor1.601.70+ 6.25 %

The net profit increases by 25%, and the max drawdown decreases by 14%.
But keep in mind: more is not always better. Here’s what happens if you combine 2 trend-fading systems:

MeasureSystem 1System 1 & 2Difference
Net Profit$17,738$24,028+ 35.46 %
Average Profit per Trade$328$243– 25.91 %
Max Drawdown$2,775$2,7750 %
Profit Factor2.632.32– 11.78 %

In this example you increase your net profit, but the average profit per trade and, therefore, the profit factor decreases. The goal of combining 2 systems is to increase reward (=net profit) while decreasing risk (=max drawdown and profit factor). The combination of these 2 systems fails to achieve the goal.

For more information visit RockwellTrading.com

© by Rockwell Trading, Inc
Re-transmission or reproduction of any part of this material is strictly
prohibited without the prior written consent of Rockwell Trading, Inc.