Here's a great trading quote you may not have heard:
"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 draw-downs (periods of losing trades and unprofitability in which account equity is reduced) in order to achieve the greater returns. Deep draw-downs 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.
Join us this Thursday for a free one hour educational event where we will discuss not only the power of diversification, but also why trading with historical data is so important.
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.
A great uncorrelated market is Gold. 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 Gold (various instruments, tips for getting started, a simple strategy, etc.)? Check out our free training event this Thursday:
Master The Gap