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Reducing risk and increasing return by combining several trading systems

Updated on 2012-04-19

In today's markets, even the most profitable trading systems can suffer from substantial drawdowns. Even worse, some of them may stop working suddenly and you are left with a trading system that keeps losing money.

Even the less risky and most diversified strategy is vulnerable. There are no guarantees on how long a trading system will keep delivering profitable buy and sell signals.

Diversifying your investments in different assets is a good practice, but diversifying in different trading systems or strategies is even better. Investing in multiple strategies, each one trading different assets or having different investment styles (Long or Short for example) is what every serious trader should do.

Once you have implemented and created several profitable trading systems, the big question is: how to spread my money across these strategies in order to reduce the overall risk and improve the overall return?

The solution is provided by the new combined trading systems tool of QuantShare. This tool allows you to select several trading systems and to generate and backtest the different combinations. You can then see the backtesting result of each combination and choose the best one (For example, the one with the highest Sharpe ratio).

How to combine several trading systems

- Open the simulator manager by selecting "Analysis" then "Simulator"
- In the top bar of the simulator manager click on "Tools" to open a menu
(If you don't see "Tools" button then click on the "+" icon to expand the menu)
- Select "Combine Trading Systems" from the menu
- Click on "Add Trading System(s)" button
- Check the different trading systems that you want to include in the calculation
- Click on "Load Checked Item(s)"

In the dropdown list, you can see the different trading systems that you have loaded.
You can remove any one of them by selecting it (from the list) then clicking on "Remove Trading System".

Once you are ready, click on "Analyze" button to start the backtesting process of the different combinations.

How it works?

Let us imagine you have selected four trading systems (A, B, C and D).

The analyzer tool will backtest the following trading systems combinations:


To speed up the backtesting process, we recommend that you run each of the four trading systems individually in the simulator manager before using the combined trading systems tool.

Displaying the backtesting report

The above picture shows one report from the combined trading systems tool.
The Name in the first column is the name of the different trading systems that compose the combination.
Next to it, you can see the following statistics: Annual return, drawdown, Sharpe and percent of winners.

Annual Return: This is the total annualized return
Maximum Drawdown: It is the measure of the highest decline from a historical equity peak
Sharpe Ratio: This is a measure of risk (risk premium) and it is widely used by traders to compare the performance of different trading systems
Percent Winners: It is the percentage of trades that made a profit

Click on the "Report" button to display the complete backtesting report.

Notes regarding the report:

- Initial equity is equal to the sum of the initial equity of the different trading systems
- The number of positions at any given date is equal to the sum of the number of positions of each trading system at that date
- "Realized Traders" and "Orders Flow" combines the trades and orders of the different trading systems.
- Pending orders and orders information data is disabled ("Details" tab)

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Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.