Trading Black Swans in Forex - page 8
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I tried staying out of this conversation but I thought I'de add my 2cents.
Firsty I think that systems that have small losses and bigger wins are much better geared to handle different market conditions. Secondly I think you should always diversify in different pairs or systems that may even trade different market conditions.
If you look at a 50 or 100 year market index chart after a crash, there always seems to be a long sideways period (except the 80 crash). Sometimes the sideways market may last for upto 3 years before we see solid consolidation of stocks and equities. The difference this time is that the volitility is much higher than previous market bubbles. If you look at the AUDUSD weekly you will see the size of the range its in. I don't chase a 'holy grail' system or %1000 backtesting results as its realistic and you will be chasing your tail for years. Smart money is on diversifaction with low risk and constant optimisation to adapt to current climate.
I have a take on Diversification Over Pairs, I will show you how it fails : let's say you made trades for a number of pairs, if an unexpected massive events occurs, and it is against your predictions it would effect most of the pairs simultaneously, consider the most recent crash, didn't propagate to the markets of the world? Didn't effect almost every pair ? This is why I think DOP doesn't lower your exposure to the negative black swans.
I have a better approach, part of it is Distribution Over Time, it simply means you make fewer trades over time. IMPORTANT ! If you opt for DOT, PLEASE make your trades ANYTHING BUT ON A PERIODICAL BASIS. Periodical systems are among the first to be hit by a black swan when it happens. Periodicity within randomness is foolishness !
P.S. : I might use Distribution Over Time for ETFs just like for FOREX, but never for stocks as the distribution of long positions over time for a given stock will not effect the possibility of that company going bankrupt (or short positions vs big success). For stocks I have an approach (different than Distribution Over Time, different than Diversification Over Sectors) that I will publish once I am done with it.
Regards
I have a take on Diversification Over Pairs, I will show you how it fails : let's say you made trades for a number of pairs, if an unexpected massive events occurs, and it is against your predictions it would effect most of the pairs simultaneously, consider the most recent crash, didn't propagate to the markets of the world? Didn't effect almost every pair ? This is why I think DOP doesn't lower your exposure to the negative black swans.
I have a better approach, part of it is Distribution Over Time, it simply means you make fewer trades over time. IMPORTANT ! If you opt for DOT, PLEASE make your trades ANYTHING BUT ON A PERIODICAL BASIS. Periodical systems are among the first to be hit by a black swan when it happens. Periodicity within randomness is foolishness !
P.S. : I might use Distribution Over Time for ETFs just like for FOREX, but never for stocks as the distribution of long positions over time for a given stock will not effect the possibility of that company going bankrupt (or short positions vs big success). For stocks I have an approach (different than Distribution Over Time, different than Diversification Over Sectors) that I will publish once I am done with it.
Regards
What about diversifaction of systems? If you system trade forex, I would have thought having multiple systems that trade in different ways (or on different pairs) would be a good way to diversify in Forex so that you don't rely on only one system to keep performing.
What about diversifaction of systems? If you system trade forex, I would have thought having multiple systems that trade in different ways (or on different pairs) would be a good way to diversify in Forex so that you don't rely on only one system to keep performing.
What matters more than anything else for a given system is it's approach to loss (how to loose and how much?). If you diversify on high risk systems that wouldn't change much. So it depends on these systems you choose, if they are vulnerable to black swans, then on the long term they will all collapse (may be not simultaneously but eventually). Anyway the distribution of decision is distribution of risk, but I don't see that to lower your exposure to the black swans that can make you loose much, it only differs your loss over time.
Thanks for the thought ; )
Cheers
Last year around this time I created this topic to present my thoughts of Black Swan investing in the Forex market.
As you can still read the comments, some of them were insightful and some others were useless, anyways.
During the same period last year I was constituting a demonstrative portfolio of stocks on Investopedia's simulator.
What I expected is that there will be losses, but there will be few very big wins that could cover all the losses and make extra profits. Now one year later, the portfolio evolved as I expected, you can check
http://stock-swans.blogspot.com/2011/06/my-portfolio-on-06-13-2011.html