Boosting Rates Of Return With Noncorrelated Systems

SYSTEM DESIGN

Combining Noncorrelates

Boosting Rates Of Return With Noncorrelated Systems
by Richard L. Weissman

Here's how adding noncorrelated assets within a trading system and combining noncorrelated systems can help your trading.

Mechanical trading systems offer traders and risk managers a distinct alternative to more commonly used discretionary methods. Many mechanical trading systems use mathematical technical analysis, also defined as the mathematical study of past price history. I will explore methods of improving rates of return using mechanical trading systems without significantly increasing drawdowns. I will demonstrate how to use noncorrelated assets within a single trading system as well as the combination of noncorrelated trading systems.

One of the simplest examples of a mechanical trading system is the twomoving average crossover system. My intention in this article is purely to show how traders can improve their rate of return via diversification; as a result, I have purposely chosen two systems whose performance is only marginally profitable.

Using a seven- and 29-day moving average crossover trading system, the following results were achieved through the trading of dated Brent crude oil.

Instrument studied: Dated Brent (dollar value equals 1,000 barrels)

Time frame analyzed: 3/1/93 - 3/1/03

Number of trades: 98 (typical duration: zero to four months)

Average trades per year: 9.8

Net profit: +$22,910.00 (includes $75 deduction per round-turn trade for slippage and commissions)

Average trade result: +$233.78

Percent winning trades: 43%

Profit/loss ratio: 1.44

Worst drawdown: -$9,050 (8/016/02)

...Continued in the January 2004 issue of Technical Analysis of STOCKS & COMMODITIES

Excerpted from an article originally published in the January 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.

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