|
Hey hey, what's up my friend! Imagine you have a trading strategy that makes 20% a year over the long run. Sounds amazing, right? But here's what the yearly returns might look like… Year 1: +25% Now let me ask you… If you started trading this strategy in Year 3, would you still be at it after two losing years? (Year 3 was survivable. But Year 4 and 5? That's two years of watching your account bleed while your wife leans over your shoulder and asks, "So… how's trading going?") Most traders would have quit by Year 5. And that's the problem with relying on just one strategy. Because every single strategy has a market environment where it gets crushed. For example: Trend following performs beautifully when markets make big, sustained moves. But throw it into a choppy, sideways market, and it bleeds money faster than I bleed dignity at a parent-teacher meeting. Here’s the thing… Your strategy isn't necessarily broken. But rather, the market environment isn’t suitable for it. The solution? Instead of depending on a single source of returns, you have multiple strategies that profit from different market behaviours. For example…
When trend following is struggling in a choppy market, mean reversion might be doing well. When mean reversion is getting crushed in a strong trend, momentum might be picking up the slack. The idea is simple: Don’t have all your strategies experiencing their worst periods at the same time. It's like marriage. You and your spouse can't both be in a terrible mood simultaneously. One of you has to stay calm, or the whole household falls apart. Now, before you go off and stack 10 strategies into your portfolio… Stop. Because more strategies don't automatically mean more diversification. I see traders do this all the time. They trade a 20-day breakout, a 50-day breakout, a 100-day breakout, and a 200-day breakout. And think to themselves: "Look at me, I'm diversified!" No, you're not. You just have four versions of the same strategy. They're all driven by essentially the same trend-following effect. So when the market reverses, all four strategies reverse at the same time together, holding hands, all the way down. Remember... The goal is to have different trading strategies so you can profit in a bull market, a bear market, and even during a recession. Cheers, Rayner "never-put-all-your-eggs-in-one-strategy" Teo P.S. I have a 12-month coaching program that shows you how to combine multiple strategies so you can earn an extra 15 to 20% a year (across different market conditions). It starts in October. Details here. |