Within the first part of this weblog, the notion of diversifying a portfolio following a correlation matrix was briefly launched. Based mostly on this idea, the choice was made to assemble a portfolio for the NEXUS skilled advisor.
For these unfamiliar, this skilled advisor represents a grid averaging system with lot multiplier. It’s essential to acknowledge that this strategy entails inherent dangers.
Subsequently, within the improvement of this portfolio, eight symbols had been chosen for an account of 200,000 euros. Every of them was allotted an equitable distribution of the stability, i.e., 25,000 euros per image.
It’s noteworthy that every image was configured with a most restrict of four to 7 open trades, after which a loss can be thought-about, and the trades can be closed. This strategy goals to mitigate related dangers.
To counterbalance the potential adversities of 1 image with the favorable moments of one other, the next forex pairs had been chosen: AUDUSD, AUDCAD, EURUSD, EURGBP, EURJPY, GBPNZD, USDCAD, and USDCHF. Varied units had been created during which ranges of Take Revenue, Step, and most variety of allowed trades (between four and seven) had been optimized.
These units had been adjusted for a 5-year interval, and probably the most favorable outcomes had been taken, looking for an optimum Sharpe Ratio and a variety of trades that supported the validity of the evaluation.
Beneath are the assorted chosen units. Please confer with the connected picture for extra particulars.
As soon as this preliminary portfolio was constructed, an actual account was opened and the portfolio was put into motion. Nonetheless, it was quickly noticed that the losses outweighed the features, indicating potential flaws within the portfolio idea. It had been an impulsive resolution, and it was evident {that a} new layer of verification was wanted earlier than continuing.
The primary take a look at performed was to rerun the backtests on one other dealer, verifying the outcomes obtained via the preliminary optimization course of. It was shortly observed that the USDCHF set carried out nicely on the primary dealer however not on the second. Subsequently, as a substitute of falling into the entice of over-optimizing the set, it was discarded.
Consequently, it was determined to visualise the portfolio on a single graph and procure further information for a deeper evaluation. The connected picture supplies a transparent illustration of those components:
The blue curve represents the stability and reveals the general development of the portfolio. Nonetheless, one noteworthy information level within the picture is the interval of stagnation, evidenced by 140 days the place the account skilled no development.
Regardless of this stagnation, the form of the curve was encouraging and satisfying. Nonetheless, the necessity to apply one other layer of data to refine the system and tackle recognized flaws was acknowledged.
One of many potential errors that might have been made is the extreme correlation between the completely different configurations and symbols throughout the portfolio. To handle this concern, a genetic device was used to mix the various outcomes of every backtest to be able to seek for vital correlations.
On this context, it was established as a criterion that any ensuing mixture mustn’t present a correlation exceeding 30%. After the evaluation, this system instructed the exclusion of two of the remaining 7 units, because the outcomes of AUDUSD and GBPNZD confirmed vital correlation with the outcomes of different symbols.
The connected picture illustrates the present portfolio composition, consisting of AUDCAD, EURGBP, EURJPY, EURUSD, and USDCAD, after this choice and adjustment course of. This strategy goals to scale back extreme correlation between configurations and symbols, thus selling larger diversification and robustness within the portfolio.
Within the introduced picture, it may be noticed that whereas the portfolio curve seems extra uniform after the changes to scale back correlation, the interval of stagnation has barely elevated to 181 days. At this level, this phenomenon is attributed to the discount within the variety of trades throughout the system.
Confronted with this case, the query arises as to what the subsequent steps ought to be to enhance and develop the system. On this regard, the thought is to element within the subsequent weblog entry a plan to optimize a brand new set of methods. This new strategy will give attention to basing commerce exits on market hours, i.e., establishing methods that settle for losses throughout particular market hours and shut trades exterior of these intervals.
This strategy goals to capitalize on market variability primarily based on hours, permitting for extra exact danger administration and doubtlessly rising buying and selling exercise throughout extra favorable occasions. Within the subsequent weblog entry, this optimization plan will probably be detailed, and the outcomes obtained upon implementation will probably be shared.