That is what try to explain in thread above yours. Trading in multiple currency-pairs means less time to find a really good trend. I am sure many newbies think trading in multiple currencies is about spreading risk. For me, that wouldn’t be the reason for using it.
You have a good point, and here’s how I view it and believe the turtles viewed it.
Diversification was KEY! because say the EUR/USD pair went from trending to range bound everytime you might get a signal at say 55-day high or 55-day low, you get in and it turns around back towards the range, you’ll be sucked in trade after trade withering your account balance away.
The reason the turtles were so successful is they never missed a major trend, and if there’s one thing I know for SURE is any market trends and will ALWAYS trend. So while they were getting faked in and out trades of EUR/USD, they were riding a trend somewhere else meaning they were more than making up for their loses.
That’s how their system worked. More losing trades than winning trades, but because of their money management system they made much much more from their winning trades than their losing trades. And that’s why diversification is KEY!
Well, the thing is, if their system had a positive expectancy, regardless of whether they diversified or not, they would’ve have remained profitable over an infinite number of trades.
Whether you diversify or increase your per-trade risk, you’re still increasing your exposure to the market(s) and, in turn, your potential loss.
I think that is contradictory to what you said. If a system has a ‘positive expectancy’ then diversifying meaning you increase exposure to profits and not losses.
Theoretically, if you stick to EUR/USD you would’ve stayed alive in a prolonged range bound market by reducing tradable capital by 20% every time they went down 10%. But that’s over an infinite amount of trades, unfortunately I don’t have infinite years on earth, and want to make money in a reasonable amount of time. That is where diversifying markets helps, by increasing likelyhood of a major trend developing in some market.
Diversifying does not increase or decrease your risk, particularly. Piecewise, each instrument would have it’s own particular expectancy isolated from any other instrument (unless Pierson’s R is ±1).
My point is that your exposure is increased proportional to every instrument you trade in. It is possible to lose 10 simultaneous trades, even if you diversify and it is just as likely (discounting any edge, positive or negative) to win 10 simultaneous trades.
The last sentence I completely agree with, because we can’t predict what will happen after we enter a trade. It could very possibly move against you and 9 other trades do the same successively.
I have a slight feeling you guys consider diversification a part of reducing risk by spreading it. Mine would be using diversification to increase the chances of finding a hot trend. If I am a good trader, I would only need being going long one or two trades at a given point in time. The point is, it is important to monitor many different trades looking for the best one at that given point in time.
I wonder where The Turtle Stand on this one.
The Turtles saw it both ways. They used a large number of markets to increase their trading opportunities. They also used a large number of markets to avoid being overly exposed to singular sets of risks (most of the time). They limited the number of positions they had in closely linked markets to avoid the situation where their positions went bad in unison, creating oversized drawdowns.