Enhancing Trend Following Performance Using System Diversification

In this article we elaborate on the significance of system diversification in trend following, emphasizing its role in reducing portfolio volatility and enhancing the ability to capture exceptional market movements, known as ‘Outliers’. By applying various trend following models to the same market, investors can create a composite of strategies that offset correlations and tap into diverse market opportunities, as opposed to relying on a single system. This approach mitigates the risks associated with selection bias and overfitting, common in traditional methods that focus on historical performance. The ensemble of models, each tailored to different trend durations and patterns, allows for a more adaptable and resilient trading strategy, capable of navigating a wide range of market conditions and maximizing the potential for significant returns. The article also highlights the strategic benefits of controlling portfolio correlations and expanding market engagement through system diversification, underscoring its value in creating a robust and dynamic trading approach.

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