Adrian Reid explains how to survive long flat periods in trading systems. Diversify across systems, timeframes, strategies, and uncorrelated markets so one underperforming system doesn't tank your total equity. A single system's drawdown looks worse in backtests than in a real portfolio.
What do I do if there's a long period where the system just might not make money? Now, how many of you realize that there could be long periods where trend following just doesn't make you any money? Yeah, absolutely agree. Patience is the key here. Now there's one more key.
Diversification. So if you are only trading that system.
Could you hang out for five years waiting for it to hit a new equity high?
That's going to be a big ask.
But if you've got systems in several different markets, some very long term trend following, some shorter term, some momentum, some mean reversion, and some systems in uncorrelated markets, crypto futures, whatever else, then the fact that that one system, which is a small part of the portfolio, is not making money for an extended period of time, you, you don't really notice it because what you notice when you're trading day to day is your total equity and the level of activity that you've got and the size of individual losses that you're incurring. And every now and then you notice, wow, I've got this really big trade that's just going and going and going. But what you don't really notice if you've got multiple systems mixed together is exactly how this system is affecting my equity. You only notice that when you run a backtest on that one system. So you can actually dilute it and you know, as your, as your capital grows and if you've got big capital, you have to dilute it anyway because you're going to want to spread your money around between multiple different systems. So it becomes much less of an issue than you think. When you're back testing that one strategy.
Sa.
