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:
|Measure||Coin Collector||Coin Collector|
|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 Factor||1.60||1.70||+ 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:
|Measure||System 1||System 1 & 2||Difference|
|Net Profit||$17,738||$24,028||+ 35.46 %|
|Average Profit per Trade||$328||$243||– 25.91 %|
|Max Drawdown||$2,775||$2,775||0 %|
|Profit Factor||2.63||2.32||– 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.
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