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Mathematics of Diversification

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Ubzen
5394
Ubzen  

Ok, I suck at mathematics. Therefore my question is derived mostly from a numbers angle. However anyone with multi_currency or diversification experience could help.

Lets say my expert advisor looks for $1 take profit when back-testing on single_currency pair. I get results as follows on different pairs after 2012 year back-test. The numbers below are just for this case study and not actual back-test numbers ;)

  • Symbol     $Maximum_DrawDown     $Annual_Return
  • EurUsd      $500                               $1100
  • AudUsd     $300                               $1000
  • GbpUsd     $2000                             $1100
  • UsdCad     $200                               $900
  • UsdChf      $500                               $900
  • UsdJpy      $3000                             $800 
  • EurChf       $150                              $300
  • EurGbp      $1000                             $800
  • EurJpy       $3000                             $1000

My biggest question here is, should I trade all the above currency in single_currency mode. Or should I have all currency aim for the $1 profit then close_all?

Other questions.

-Should I only trade UsdCad because it gives me the best Return/Drawdown value?

-Should I exclude the pairs with the biggest drawdowns i.e (jpy) denominated pairs?

*Note, I want to trade as many pairs as possible because I believe they all have positive expectations. However, some seem to have more risk than others. Also, by having all target the same goal, I feel like I'm paying too much spreads for the buck. Help.

Biantoro Kunarto
16659
Biantoro Kunarto  

Hi Ubzen,

In my opinion, you can use multi currency with volume of lot calculation based on percentage of Drawdown or based on Annual Return

  • Based on Drawdown ( bigger draw down means smaller percentage )
  • Based on Annual Return ( bigger Annual Return means bigger percentage )
  • Or using both 
Example :
          Symbol     $MaxDrawDown     % based on Drawdown     $Annual_Return     % based on Annual Return
  • EurUsd      $500                        9.45 %                                 $1100                      13.92%
  • AudUsd     $300                        15.75 %                               $1000                       12.66 %
  • GbpUsd     $2000                      2.36 %                                 $1100                       13.92 %
  • UsdCad     $200                        23.62 %                               $900                        11.39 %
  • UsdChf      $500                        9.45 &                                 $900                        11.39 %
  • UsdJpy      $3000                      1.57 %                                 $800                        10.13 %
  • EurChf       $150                       31.5 %                                 $300                        3.8 %
  • EurGbp      $1000                     4.72 %                                 $800                        10.13 %
  • EurJpy       $3000                     1.57 %                                 $1000                       12.66 %
          Total         $10650                                                              $7900        
Ubzen
5394
Ubzen  

Very good idea. Adjust my lot-size according to my [fear|greed] or [risk|return]. I'll attempt using draw-down% as a guide for the lot_sizes. Thank You :) Interesting what happens to EurChf. Based on drawdown, it wants me to bet_more. However based on returns, it wants me to bet_less. What do you make of that? 

Simon Gniadkowski
Moderator
18024
Simon Gniadkowski  
Ubzen:

Very good idea. Adjust my lot-size according to my [fear|greed] or [risk|return]. I'll attempt using draw-down% as a guide for the lot_sizes. Thank You :) Interesting what happens to EurChf. Based on drawdown, it wants me to bet_more. However based on returns, it wants me to bet_less. What do you make of that? 

Are you looking at DrawDown and return as a $ figure or a percentage ?
Ubzen
5394
Ubzen  
RaptorUK: Are you looking at DrawDown and return as a $ figure or a percentage ?
Both actually. The Starting Deposit is $10,000 if that helps. I want the default view in $_Dollars because those are the minimum losses it can sustain given my broker's minimum_lot and current money_management.
Simon Gniadkowski
Moderator
18024
Simon Gniadkowski  
Ubzen:
Both actually. The Starting Deposit is $10,000 if that helps. I want the default view in $_Dollars because those are the minimum losses it can sustain given my broker's minimum_lot and current money_management.
EURCHF has the smallest $ DD but the largest %age DD wouldn't basing your decision on the $ DD suggest you should bet_more but based on the %age bet_less ?  hence my question . . . 
Ubzen
5394
Ubzen  
RaptorUK: EURCHF has the smallest $ DD but the largest %age DD wouldn't basing your decision on the $ DD suggest you should bet_more but based on the %age bet_less ?  hence my question . . . 
Those %tages aren't provided by me. EurChf has the lowest_dd in % and the lowest_return in %. biantoro is suggesting that I wager 31.5% on EurChf when basing my decision from a Risk_Adverse [minimize my drawdown] point_of_view. However, from a Risk_Taker [maximize my returns], his money_management suggests that I wager 3.8%. At least thats how I interpreted it.

Simon Gniadkowski
Moderator
18024
Simon Gniadkowski  
Ubzen:
Those %tages aren't provided by me. EurChf has the lowest_dd in % and the lowest_return in %. biantoro is suggesting that I wager 31.5% on EurChf when basing my decision from a Risk_Adverse [minimize my drawdown] point_of_view. However, from a Risk_Taker [maximize my returns], his money_management suggests that I wager 3.8%. At least thats how I interpreted it.

Ah,  sorry . . . I see now.  
Ubzen
5394
Ubzen  
RaptorUK: Ah,  sorry . . . I see now.  

Its all good. As I suspected, the percentages sums up-to 100%. Therefore, I can break my 10k deposit down into those parts and assign them to the corresponding symbols. Also another way of looking at it would be to Scale them down. Example: EurUsd = 0.09 lots | AudUsd = 0.15 lots | UsdJpy = 0.01 lot | EurChf = 0.31 lots and Etc... Using 0.31 as the base_lot for EurChf is somewhat scary but given the low draw-down this makes sense.

On the other hand, I cannot see why EurChf gets hit so hard because of it's low returns. Its like polar opposites | from biggest size to smallest size. 

Stephen Njuki
5205
Stephen Njuki  
What if you use a notional 'yield'.... where by you take it that the drawdown amount represents the minimum investment required for each currency, and the return is then expressed as a percentage of this drawdown amount. The resulting percentage yields you get can then represent weightings for allocation in a portfoio if you want to invest in all currencies...
Ubzen
5394
Ubzen  
ssn: What if you use a notional 'yield'.... where by you take it that the drawdown amount represents the minimum investment required for each currency, and the return is then expressed as a percentage of this drawdown amount. The resulting percentage yields you get can then represent weightings for allocation in a portfoio if you want to invest in all currencies...
Good Idea... Thank You.
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