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The Importance of Correlation and Combining Systems

November 17, 2009

One standard practice among traders is to trade multiple stocks, markets or systems in the hope that they will reduce total risk and improve consistency. But there are a lot of structural matters to consider to achieve good diversification. Here are some ways a trader can typically diversify:

1) Diversify using the system on multiple stocks

2)Diversify using the system on multiple markets

3) Diversify using multiple systems

4) Diversify using “structural” diversification: this involves buying asset classes like real estate/REITs, index funds, or fixed income where the trader does not have to rely on having winning systems or themselves to make a buck. This is a very important and neglected area that functions as a vital parachute when things are not going well.

to be continued…………

 

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