By: Scott Andrews of Master The Gap
Trading is full of counter-intuitive ironies. Some of my favorites include:
"the best time to buy is when everyone else is selling"
"you can not make money, without risking money"
"to make more, you need to trade less"
"you CAN go broke taking profits (too early)"
And here's a lesser known one:
"It is better to trade two complementary strategies that make less, than one strategy that makes more"
Yes, it is almost always true. Traders can make more profits (over the long term) by trading two conservative, complementary strategies that have lower, combined profit potential than trading one aggressive strategy that has a higher profit potential.
The reason is not obvious and frequently over-looked until it is too late: The single, higher profit strategy will often endure larger, deeper drawdowns (periods of losing trades and unprofitability in which account equity is reduced) in order to achieve the greater returns. Deep drawdowns are stressful and cause the trader to second-guess his strategy, skip trades, reduce position size, cut winners short and so on - all of which are detrimental to the long term profit potential of the strategy. Dreams of riches often end in a nightmare of losses.
To minimize these self-destructive behaviors and maximize the odds of long term, consistent profitability, it is better to diversify and trade strategies and / or markets that are not related or similar. The goal is to achieve no or low correlation, so that when strategy A is struggling, strategy B is performing and vice versa.
Here's a brief video that explains the "in and outs" of diversifying your trading, including a compelling equity curve example: The Power of Diversification
Applying your favorite strategy to just about any new market will certainly provide many of the benefits of diversification. But to maximize the power of diversifying, it is best to trade a market that "moves to its own beat." Meaning, one that does not move up and down in sync with the equity markets or instrument that you might trade. This is called low correlation.
One of the most liquid, uncorrelated markets is Crude Oil. It can be traded using stocks, ETF, options or futures. Furthermore, it moves a lot on a daily basis - much more than the major U.S. indices such as the Dow and S&P.
Want to learn about trading this intriguing market (various instruments, tips for getting started, a simple strategy, etc.)? Check out this short video: Introduction to Trading the Oil Market
Carpe diem and good trading!
Scott
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On Wednesday, August 28th, Scott Andrews of Master The Gap will share a comprehensive research study for trading the opening gap in oil.
During this 1 hour event, a wide range of time-frames and scenarios will be reviewed showing what has worked best over the past 6+ years. Detailed templates will be included that can be used to create your own actionable gap trading blueprints.
Whether you are already trading oil or interested in starting, this special event and research study can help you create a solid trading plan based on what has worked over the past 1500+ trading days.
It is better to use the complementary strategies . It is better to do long term trading.
Thanks for the comment Chitra. Longer term strategies can be best for folks with large accounts and lots of market timing experience, but I and many folks find it easier to capture small intraday moves that repeat themselves frequently through the course of a year, than to catch the large swing moves that may occur only 3-4 x per year.
Plus, there is a huge learning curve advantage and less dependency on catching "that one big move" when trading more frequently.
The key of course is for each trader to trade in a manner that suits his goals, account size, risk tolerance and personality. If not, it is highly unlikely you will achieve your goals.