A trading plan offers traders many choices and options, as discussed in previous articles. Here are the core elements each trading plan should incorporate:
- TOFTEM model
- Trade management
- Risk management
- Money Management
- Trading psychology
- And many more (read here about how to build a strategy)
In most of these examples we are assuming a simple model, where Forex traders are trading one strategy with one pair with one entry. At best we have looked at multiple entries and one pair, or one entry on multiple pairs.
But what happens if the complexity is increased and a trader starts to trade multiple strategies? Trading becomes more diverse but also a tad more complicated. That is why it is crucial that traders read this article carefully to figure out if they are ready for the next step of trading multiple strategies.
ARE YOU READY FOR MULTIPLE STRATEGIES?
The 2 main criteria when deciding if you are ready for multiple strategies are the following:
- Experience level
- Success with 1st strategy
- Level of automation
Experience level is a very important factor whether you can trade with multiple strategies or not. A trader needs a vast amount of experience in trading Forex before they can cope with multiple strategies. Traders typically tend to be in 4 stages of development (read here for more info):
- Beginning traders: these traders are engaged in understanding the basics of a chart, learning basics tools and indicators, how to use the platform, etc. Engaging in multiple strategies is way too complex and quickly leads to a destruction of a trading account, which in a worst case scenario could lead to the end of your trading career.
- Developing traders:although the basics are better understood, these traders are still struggling with creating the first strategy, their own trading psychology and at times even risk management. It is therefore too early to trade multiple strategies.
- Mature traders: these traders are better equipped to handle trading multiple strategies because they are quicker and more consistent in processing, analyzing and handling their analysis and strategy.
- Consistent traders: most of these traders branch out and trade multiple strategies. Although mature traders might trade multiple strategies, most consistent traders tend to have at least 2 or more approaches.
Success with a 1st strategy is an important factor as it is recommended not to seriously trade a portfolio of strategies before profit is reached with at least one of them. The reason for this is simple: focus on creating one good one instead of multiple bad ones.
Level of automation is another aspect which will naturally cap the number of strategies. The more automation, the more strategies traders can handle. The less automation, the more difficult it becomes for traders to add strategies. Obviously time is limited and less automated strategies usually take more time to execute.
ADVANTAGES OF MULTIPLE STRATEGIES
The most important advantages of trading multiple strategies are summarized here:
- Diversity when trading: being less dependent on one method is useful as the results are usually more evenly distributed and the ups and downs of each strategy are less bumpy.
- Trading psychology: all strategies have their good parts and their faults. When you focus on one strategy, the faults become noticeable and annoying. This increases the likelihood that a trader will want to temper with it and change it, despite the fact that the strategy could be profitable.
- Risk spread: trading a portfolio approach helps spread the risk over multiple strategies. By spreading the risk over multiple strategies a trader is in fact decreasing its overall business risk. For instance, trader X only trades one strategy with 2% risk on each trade. Trader Y trades 2 strategies and places one% risk on each trade. Although both risk 2%, trader Y is not dependent on one outcome but 2.
- Some disadvantages are at times increased confusion and paralysis of analysis.
To successfully trade with a portfolio of strategies, you do need to change a number of elements before a coherent approach can lead to profitability. Here are the key items to keep in mind:
- Risk management: it’s very important to keep the overall trading risk limited to your usual risk levels. If you trade with 2% risk, keep the total open risk close to that level but spread the risk over multiple strategies. For instance, with 3 strategies you could choose to trade one strategy with 1% and the other 2 both with 0.5% risk.
- Keep your strategies separate: do not mix up the rules of 2 strategies with each other. With multiple strategies it could be tempting to let the rules of one strategy impact how you trade a 2nd strategy, but it is important to keep / trade the rules and guidelines of each strategy separate. It could also be good to keep separate accounts for each strategy as well.
- Increase in time: more strategies means more analysis, more monitoring, more trade management, etc.
- Things that should stay the same (no change) are: keeping statistics separate of each strategy performance, evaluations, and the tools and indicators which are used for the strategy.
HOW TO HANDLE IT?
When building or implementing a new strategy, a few steps are crucial to successfully complete this process.
The first things you want to do rigorously are back test and forward test the strategy independently from all other strategies. Obviously, the strategy has to be worthwhile to add to your portfolio.
Secondly, you need to decide to trade the strategies on one account or on separate accounts. There are advantages of trading it separately due to the margin and ease of monitoring the positions.
Thirdly, you want to analyze the portfolio and understand how the new strategy differs from the other strategy(ies) you have. It is useful to understand the differences and similarities and to note -the advantage of trading the new one. In general avoid trading systems that are too similar in time frames, pairs, or type.
Fourthly, allocate risk management per strategy. Keep your eye on the total risk, drawdown levels and other statistics of the entire strategy portfolio.
Lastly, evaluate the performance of the individual strategies and as a total.
Do you trade multiple strategies? IF yes, what has been the most difficult part of trading with multiple strategies? IF no, at what point will you consider it and what parts do you think will be the most challenging?
Thanks for sharing and wish you Happy Trading.
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