Adrian Reid explains parameter set diversification: splitting capital across multiple versions of the same trading system with different settings, like various moving-average pairs. It reduces slippage by spreading trades across different days and smooths equity curves, but it's a modest edge compared to adding different strategies or markets entirely.
What is parameter set diversification and should you use it in your trading? In this video I'm going to explain what this awesome concept is, how it can help you with your trading and when you should consider using it. So stick around, check this out. But before we go any further, make sure you hit the subscribe button and give this video a thumbs up so that you get notified of all of my future videos. Because I've got new trading content coming out all the time and I don't want you to miss a thing. There's a couple of considerations and a couple of reasons why you would diversify the parameters within your systems. And what I mean is, let's say take a dead simple system, let's take a two moving average crossover system. I'm not recommending you trade this system, it's a bad system. But just for the purpose of illustration, let's say it's a 50 day, 200 day moving average. You buy when the 50 crosses above the 200, you sell when the 50 crosses below. Just a stupid simple system. To illustrate the example, if you traded all your money with the 5200 day cross, that's one system. But you could also, instead of trading just that one system, you could do parameter set diversification and maybe you Trade with a 25, 180 day crossover with half your money and a 50, 2200 day crossover.
With the other half of your money. And that will give you two different, well, two different systems that are highly correlated because they make money in the same general market conditions, but they're going to be getting in and getting out of different stocks at different times. There's a couple of advantages to doing parameters and diversification. First one is you spread your trades over different days. So if you have a 5200 day cross and a 250080 day cross, there's very little chance that you're going to be getting into the same stock on the same day. With both systems. The advantage of that is that you end up with less slippage because your entry into a stock, if you happen to get into the same stock with both systems is over different days. So, so part of your position comes on here, part of your position comes on here. They don't happen at the same time. You get less slippage because each trade is a small position size. The second advantage of doing it is to create diversification, the equity curves. And this is probably the more interesting.
Question and what you've really got to think about is how different is the performance. And is that my best means of diversification. So if you've got one trend following system and that's all you've got, and you say, okay, I want to diversify my portfolio and I'm going to do that by change, by taking half my money and trading a 5200 day cross and the other half of my money and trading at 2580 day cross, that will give me some diversification, I'll feel better about the world. Yeah, okay, but it's not your best diversification step you could make. A better diversification step would probably be strategy or market diversification, you know, trade another stock market or trade a different strategy or trade a different strategy in another stock market. So as a diversification step, it does give you some diversification because the equity curves will be a little bit different, the timing will be a little bit different. But it's not the biggest diversification step you could make. You know, you could add crypto to your, to your trend following, to your stock trend following system that would give you more diversification than parameter set diversification within trend following. So it's a valid step for either of those two reasons. Either to spread your execution so you reduce your slippage if your account is big, or to diversify your portfolio so you smooth your equity curve. But the question you know, which one you're really doing it for is important. If your account is not so big that you're getting slippage, then there's, there's no point doing parameter set diversification to reduce your position size. All you're doing is creating more trades and more activity for very little reason. But if you're doing it because of diversification, then ask yourself, is this the best diversification step that I can make? And if you've already got a couple of different strategies in a couple of different markets and you want to diversify even more than yes, do parameter set diversification.
