The importance of multiple systems

One of the things I’ve learned since I’ve gotten serious about trading, is that even if you have a great system you’re happy with (Dave and I’s swing system), it still makes sense to trade it in conjunction with other, possibly less profitable systems.

Let me try to explain what I mean. The swing system (and it’s multiple variations we run) has by far the highest $ return per bar as well as the highest return based on the amount risked. However, those numbers can be misleading on a portfolio level as it is simply not possible (or advisable) to keep a constant exposure to take advantage of times the market goes straight up (ie last fall or this April).

Also, the swing system can underperform when the gains are concentrated in the very largest stocks (like the current Dow led rally) since most of the swing holdings are higher beta names. This is one of the reasons I worked on the ETF trend following script and the reason that Dave uses his “Modified IBD” system. Both of these are longer term holds - weeks to months instead of days and will obviously have higher drawdown to return ratios and lower profit per bar #s. However, in times where there aren’t any good opportunities to add swing trades or times when high beta is lagging, having a percentage of your portfolio in a system like that helps you keep up with a strong bull market.

Today is a great example, my portfolio is 30% ETFs and 70% Swing Trades, yet my 30% ETFs made more dollars for me today than my swing trades.  Dave had a similar situation with one of his recent IBD type entries that was up over 3% today.

-John