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>
>
> Tushar Chande has some interesting insights in his book "Beyond Technical
> Analysis". He looks at the Standard Error (SE) as a measure of
> 'smoothness' of the equity curve (Chapter 6 "Equity Curve Analysis") on a
> portfolio and looks for the effects of diversification on that SE. He
> applied a representative trading strategy and looked for the effects of
> diversification across markets, altering exit strategies and altering
entry
> strategies. He found that changing exit strategies reduced SE by no more
> than 20% but with a substantial reduction in profits. Diversification
> across markets actually increased SE. However changing entry rules did
> give a smoother equity curve.
>
> ----------
> > From: Tom Cathey <K1JJ@xxxxxxx>
> > To: omega-list@xxxxxxxxxx
> > Subject: Diversification - Natural Selection
> > Date: 31 March 1998 02:31
> >
> > Hi Everyone -
> >
> > I saw a number of good posts on diversification, and thought I'd add my
> > thoughts too.
> >
> > I've personally found that diversifying into a large number of
positions
> > seemed to have no effect on risk over time.
> >
> > I trade 22 different commodities at this time.
> >
> > I realize this sounds simple (like my brain) but here it is:
> >
> > What I do is analyze each commodity on it's own merits. If, after going
> > through the list and screening them all, I come up with 8 "strong" and
> > different trades, I take them all......up to my margin limits.
> >
> > If after screening, there is only one candidite, I take only that one.
> >
> > The point I'm making is that I feel it's a mistake to add more
> questionable
> > positions into your portfolio just for the sake of "diversification".
> > Rather, let your own natural criteria of selection dictate whether you
> will
> > have a lot or a small number of positions that holding period.
> >
> > Random events being what they are OVER TIME, it is just as easy to have
> ALL
> > positions going for or against you at any one time.
> >
> > The only exception (less important) that may have merit is to have a
> > balanced short and long mix...ONLY IF the individual trades stand
strong
> on
> > their own criteria...NOT for the sake of balance.
> >
> >
> > What really works well for me here is this:
> >
> > I look for trades to jump out at me....they really will sometimes,
since
> > your criteria will naturally all come together at certain times. When
> this
> > happens, I will take on 2-3 times my normal contract size. Even if it
> means
> > having only one very large position - I would much rather have all my
> eggs
> > in one "stong" basket rather than all the eggs spread over luke-warm
> trades
> > for the sake of "diversification" -
> >
> > Any other thoughts on this?
> >
> >
> > Tom Cathey
> >
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