Way of the turtle

System Diversification
In addition to diversifying across markets, you can increase the
robustness of your trading program by diversifying your systems.
Using more than one system at a time can make a trading program
significantly more robust, especially if the systems are significantly
different. 
Consider two systems. The better one has an RAR% of 38.2 per-
cent with an R-cubed of 1.19, and the worse one has an RAR% of
Bulletproof Systems
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14.5 percent and an R-cubed of 0.41. If you tested both systems,
which one would you trade? Would you trade only the better one?
That seems the logical choice.
However, that choice ignores the benefits of diversification when
the systems are not correlated. Those benefits are even greater
when the systems are negatively correlated (i.e., one tends to make
money when the other one is losing money). That is the case with
particular systems that provide very significant benefits when they
are combined, as you will see below.
Trading both systems at the same time has an RAR% of 61.2 per-
cent and an R-cubed of 5.20. Needless to say, that is a significant
improvement over the performance of either system alone.
The systems mentioned above are actually the two parts of the
Bollinger Breakout system. The better system trades only long
volatility channel breakouts, and the worse system trades only short
volatility channel breakouts. It is fairly easy to understand why these
systems work well when combined, but the improvement in per-
formance is quite dramatic.
One can get the same benefits by combining systems that work
well in different market conditions, such as one that performs well
in trending markets and another that works well in markets when
there are no trends. When one is suffering a drawdown, the other
one may be profitable, and vice versa. This does not always work
out as smoothly as one might hope, but you can improve the robust-
ness of your trading program greatly with approaches like this.
As with market diversification, the limit to system diversification
is that it often requires significant capital or management effort to
trade many systems at the same time. This is one of the reasons suc-
cessful hedge fund operators have an easier time than do individ-