Thread by @theBuoyantMan

**Diversification** in Systematic Trading:

Trading one strategy forever sounds like a dreamy idea.

But it just doesn't work that way.

If only reality granted wishes.

How should you approach diversification? Should you diversify?

A beginner level discussion below 👇

1/ There are many kinds of trading strategies.

For the sake of this thread, they are broadly categorised based on the following.

# By type of instruments traded
- Cash only
- Futures
- Options
- Hybrid

2/ You can classify strategies based on market bias

- Long only
- Short only
- Hybrid (with slight bias)
- Market neutral

3/ You can classify strategies based on the signal generation and trading mechanism

- Trend Following / Momentum
- Mean Reversion

Then there are statistical arbitrage strategies, and market making.

4/ You can further classify strategies based on whether the strategy would be unscalable or have decent level of scalability.

These would include strategies that work with only one instrument at a "hard to scale" level to strategies that work with many instruments when tweaked.

5/ So, when it comes to diversification, you can take one of the following approaches.

- Multiple uncorrelated unscalable strategies (to a certain level)

- Same strategy across different uncorrelated instruments

- Same strategy tweaked for each uncorrelated instrument

- Multiple uncorrelated highly scalable strategies

6/ The reason for avoiding correlation is that you're better off trading a stronger of the two correlated assets instead of trading two different correlated assets.

7/ Also, trading uncorrelated assets takes care of regime changes.

When one of the assets is underperforming for the same strategy, another uncorrelated asset might be having its time of the day for that specific strategy.

That will take care of getting you returns.

8/ Also be aware that established correlation or non-correlation can also change.

For instance, this march, a few instrument pairs thought to be uncorrelated or inversely correlated, didn't work that way.

9/ A general framework for trading can work for a long time, but specific rules may stop working.

So, you should always be researching and developing systems, keeping them ready to be commissioned and old ones that stop working to be deprecated.

10/ By all means trade one system only if it works great for the instrument you're trading.

But remember there will be drawdowns and regime/market cycle changes you will have to adapt to and go through with patience.