Diversify with non-correlated systems

Cont’d from yesterday…

Another way to diversify is to concurrently trade types of systems that are not correlated, even using the same asset to do that with. An example would be trading an asset (such as the S&P Futures) concurrently with a trend following system and a trading-range system because those two types of systems are generally not correlated. Prices are either moving persistently in a single direction or they are stuck in a range, but not both at the same time.

A trend following system is one that attempts to profit from price tending to move over time either up or down. The moving average crossover system mentioned in yesterday’s article is an example of a trend following system.

A trading range system is one that attempts to profit when prices are stuck between two numbers, the upper number called Resistance and the bottom number called Support. An example of a trading range system is one that buys when Stochastic readings are under 20 and sells when Stochastic readings are above 80.

continued tomorrow ...

Copyright 2007 Raymond T. Lee. All rights reserved.
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