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How to achieve Diversification for Consistent Equity Growth

Nick Radge explains diversification

Published August 9th, 2021

People often wonder to how to achieve diversification for consistent equity growth.

Diversification means different things to different people. Nick Radge trades predominantly equities in the Australian and US markets, long only.

Before watching this video please read our RISK STATEMENT. This video discusses how Nick Radge diversifies his portfolio. He is NOT giving personal advice. Speak to your accountant, adviser or financial planner before you embark on any trading strategy.

 

Diversification, to Nick, means finding strategies that diversify rather than multiple products. Nick trades a portfolio of strategies.

Nick trades The Chartist’s Growth Portfolio, the US High Frequency strategy, Trade Long Term premium portfolio and a few other short and longer term strategies.

Take a free trial with The Chartist to view the different strategies.

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How to Achieve Multiple Layers of Diversification – Transcript

Andrew Swanscott:
Hello, and welcome to Better System Trader live. Today we’re going to be talking about, how do you consistently grow your equity using the power of multiple layers of diversification. Let’s get to it. Hello and Welcome to Better System Trader live. As I mentioned, today we’re going to be talking about diversification and how we can use that to consistently grow our equity. And today joining us, our special guest is Nick Radge from The Chartist. Now Nick Radge has been trading since I think 1985. He started out in the, I think a floor trader on the Sydney Futures Exchange. He is a specialist in systematic and algorithmic trading strategies. He is a trader, an analyst, an author, an educator and an all around good guy. Welcome Nick, how are you today?

Nick Radge:
Good. Thanks Andrew. Thanks for having me on again. It’s good to be back that’s for sure. Good to have you back too.

Andrew Swanscott:
Thank you very much. Now you’re based up in Queensland, which for people who aren’t really good with geography is also in Australia, on the East coast. But you’re a good couple of thousand kilometers away from me, so you’ve got nice warm weather and you’re not locked down as hard as we are down here in Victoria. I’m quietly jealous Nick, of you right now. But without making me too much more jealous, how have you been coping the last, I don’t know, six or nine months or so with all the crazy stuff that’s been going on?

Nick Radge:
Look, we’re pretty unscathed up here. We personally, Trish and I were over in Japan when it all started. We came down and we had to go into lockdown two weeks, which wasn’t particularly nice. I do feel for you down there, that’s for sure. But look, Queensland’s been pretty well unscathed and once we opened up, it’s almost business as usual up here. It’s school holidays here [inaudible 00:01:58] at the moment. It’s very, very busy, main beach is busy, [crosstalk 00:02:03] street it’s busy. It’s pretty good. The market’s are treating me well as well, so I’ve got nothing to complain about.

Andrew Swanscott:
Nice. I’m very jealous. Anyway let’s talk about the markets and trading. The topic we’re going to talk about today is how to grow your equity consistently, which I think all traders want. I think probably one of the best ways or perhaps the best way is through diversification. I think it was, was it Markowitz who said something like, diversification is the closest thing to a free lunch for… He was talking about investing, but I think it applies to trading as well. I’m really looking forward to seeing what you’re going to share with us. How about we start with some of the basics first, just so that we’re all on the same page. Can you share exactly what is diversification and what are some of the, I guess the challenges or issues in trading that we’re trying to address by using diversification?

Nick Radge:
Sure. I guess there’s two ways to address diversification, Andrew. One would be your more traditional way. I guess, you’ve had some of these commodity traders on your podcast earlier on. They look at diversification by trading very completely different markets, a vast array, 50, 60 different commodity markets, corn and wheat, financials, foreign exchange, all sorts of different things. The theory there is that, these markets are uncorrelated, they react very differently to different situations and trends will appear that will ride them up and down. I’m not quite that. Predominantly what I’ve been doing for the last 30 odd years, is trading equities. And only on the long side. I stopped really trading on the short side back during the GFC, for two reasons. First of all short selling in Australia was completely banned back then.

Nick Radge:
And second of all, borrowing stock is now a very, very difficult thing, the regulator really shut it down due to some unfortunate circumstances back then. Things were very, very difficult in Australia to borrow stock, to sell short. I favor long only strategies. And whilst some could argue that that’s not diversification, well, some of our strategies which I’ll show you do perform in certain periods of times when you would expect a long only strategy not to perform and we’ll show some examples of that as we go through. Basically the whole context here, one thing that I’ve learned over the many, many years, is that, traders, retail traders expect profitable trading or professional traders to be making money every day, every week, every month, every year. That’s just not the case, regardless. Your best traders in the world will have situations where they will have flat periods.

Nick Radge:
They’ll have drawdowns, they’ll have frustrating periods. I’m a true believer in thinking the main difference between a professional and an amateur trader, is a professional is someone who can push through those difficult periods of time, keep applying the strategy for the long term and forego what’s going in the short term noise. I really do believe that’s a big difference. If you can take a very simple strategy with obviously a positive expectancy edge and just try it for the long term, you’re going to be a lot better off than trying to find the next big winning trade that we all read about on Twitter and social media and that kind of stuff. The whole context of diversifying across different strategies, is that, I understand that strategies, any kind of strategy, regardless of how good they are, will go through those periods of frustratingly sideways, even drawdowns, that kind of stuff. Rather than trading in a portfolio of shares, I trade a portfolio of different strategies.

Andrew Swanscott:
I think that’s a really important point you make about strategies going through periods of poor performance and then good performance. But I think diversification is a bit of a funny thing, because I think for a lot of traders, it’s like, well, I know about diversification, I know I’m supposed to do it, but I think a lot of traders still don’t really go for that. I receive quite a few emails from traders who say, I’ve been working on this system for five years and I think it’s ready to go. And I’m like, well, good on you for having the persistence. But there’s a whole lot of issues with doing that. And you’ve just touched on a few there.

Andrew Swanscott:
Even in your explanation then, you touched on a few ways to diversify, a few different ways. How about we start talking about a couple of those individually and pick your brains a little bit more. One of the first ones you did mention was countries and markets. You gave a couple of good examples there, but do you want to share a little bit more about your own experiences trading different markets, how you go about selecting them, that kind of thing?

Nick Radge:
Well, again, personally I only trade in Australia and the US and I’m probably going to be adding Canada at the end of the year. Obviously the US, well, let’s start Australia. I’m Australian, I live in Australia, it’s my home country market. So obviously I’m going to be trading that. But we have to be realistic that the US market offers a huge array of opportunities and a huge array of liquidity as well. The other benefit of trading US market compared to the Australian market is it’s extremely cheap to trade it, especially when we start talking short term strategies, which I now do a fair amount of. The Australian market is buy and hold, buy only is quite expensive compared to the US. So trading in the US market for short term systems make sense in that respect.

Nick Radge:
I guess a good place to probably start is, people get frustrated when they go through a tough period of time. I’ve seen it time and time again. I’ve seen it with my clients. I’ve got portfolios that we’ve been running very successfully for decades, yet people jump on board and after three months, they turn around and say, this thing’s not working. They go off looking for something else. I call that the beginning cycle. I think it’s very, very typical, where someone comes into this game with the wrong expectation. That’s the expectation, they expect to make money consistently, daily, weekly, monthly, yearly. It’s not going to happen that way. You got to be realistic about that, but they still have that expectation. They’ll try some kind of strategy, they’ll go into a course, they’ll read a book.

Nick Radge:
They’ll find something to trade. When they get into that period of time, where there’s going to be a drawdown, or they’ve been trading for two months, their account equity hasn’t moved a great deal. They’ll get frustrated and they’ll want to change. And they’ll flick to something else, and that other strategy will then run into the same problem. They just keep following the tail backwards and forwards. A good example, perhaps if you bring up that first slide, Andrew, that I sent through to you.

Andrew Swanscott:
Yeah, sure.

Nick Radge:
This is a strategy that I personally trade, and it’s going to give you a very good indication. This is a real equity curve by the way, the last four to five years. It’ll give you a good indication of potentially what a long term very successful system can actually go through the short term. If you’re able to bring that up.

Andrew Swanscott:
That’s the second slide. This one?

Nick Radge:
No, the one before that.

Andrew Swanscott:
Sorry. That one?

Nick Radge:
Yeah. This is a strategy that I trade, it’s called the high frequency strategy, it’s a short term swing strategy on the Russell 1000. We trade a portfolio of stocks and the average hold period for this is about three days. If we want to put a style on this strategy, we would call it mean reversion. Now you can have a look there from January, 2015, over the next couple of years, the strategy returned around 30% net. Okay? That’s 0.1 you can see there on the screen. And from that point downwards over the next year or so, we went into a drawdown and we pretty well gave everything back. So between 0.1 and 0.2, we’ve given everything back. Now, two things, if you had started right back there in January, 2015, and you’re now in 2019, and your account is back to where it started.

Nick Radge:
You probably going to be pretty frustrated about that. You’ve been doing all this work, your accounts backwards, you’ve made no profit. There’s got to be something better out there. That’s a generally aligned thought. If you would start at 0.1 and go backwards, well, you’re now in a nice drawdown. You probably got the hump. You’re probably saying, well, this is a pretty crap strategy. And at 0.2, you’re thinking, damn it, I’m going to give this up. I’m going to go look for something else and you throw it in. Of course what happens? We have a year like this year comes along and we’re up 31 or 32%. Now at 0.3, the person who’s chucked out at 0.2 is going, damn I shouldn’t have done it. Or they’ve joined another strategy that has gone sideways or down for whatever reason.

Nick Radge:
They keep chasing their tail, if like. Now, what this does is, it encourages people to attempt to time strategy. That’s a question I get all the time. What’s the best time to start? The answer is always the same. The best time to start any strategy is 20 years ago. That’s the best time to start. But I can’t predict what’s going to happen in the near term. I don’t know what this market’s going to do. Nobody does. I’ve done this for 35 years, I’ve not met anyone who has a fair idea of what’s going to happen next one week, two weeks, two months, whatever. The number one thing you can do is find a solid strategy and apply it for the longterm. Now, you’re going to go through these frustrating periods of time like you can see in this particular chart, the way to overcome it, is not to attempt to time when to turn the system on and when to turn it off, that’s the wrong thing to do.

Nick Radge:
What you should actually do in my view, is add a complimentary system. If we go to slide number two, what we’ll see here is a completely different system. Now, what we have here is the same originals US high-frequency strategy with the blue equity line. And we have a trend following strategy, that trades the ASX. Now this is a slightly longer term trend following strategy. It holds positions on average for about nine months. And as you can see over this period of time, it’s had reasonably good performance and it’s filled the gap where the other system has failed. Now, the obvious question, that’s probably going to come to mind, is well, why bother trading the US high frequency and just try that ASX growth portfolio? Well, the unfortunate thing is they go hand in hand because in different environments they perform quite differently. And this is what makes it really, really interesting.

Nick Radge:
So you can see here that whilst their equity today has more or less met at the same point, we’ve got the same return. It’s been a different journey for both of them. If you’ll just rely on trading that high frequency, you would have had probably a frustrating journey and you probably would have been fine to throw it in and move on. Let’s now take a look at these two strategies in a very different environment. Let’s flip to the next slide. What we have here is the exact same two strategies, but during the GFC. Now the growth portfolio there, the red line, it goes to cash. It sits in cash. And you can see there from around early 2008, all the way through to early, to mid 2009, it sat there in cash. Now in the real world, when this happened back then we had a lot of pushback from clients.

Nick Radge:
We started our business back in the 90s, but we started this particular service, was released to the public in 2006. So this was the first time since release that this strategy got actually switched into cash. In the near term, what happens, a lot of people push back. Why are we paying you, Nick? Why are we paying you to sit in cash? We should be doing something, surely there’s something to do in this market. It wasn’t until the end of 2008, early 2009 after the market had fallen 50%. And we’ve been sitting in cash the whole time, that people realized that that was actually a pretty smart thing to do. It was a smart thing to do for a variety of reasons. One, obviously capital preservation, that’s pretty clean, but also very importantly, the psychological fortitude was still there. Coming back from a 50% loss is a pretty difficult thing.

Nick Radge:
Coming back from a 12% loss, which we had, is a lot easier. In 2009, it was a lot easier for our clients at least to switch the system back on, because they hadn’t lost that much money. Other people who had lost a lot of money, the last thing I wanted to do is actually buy stocks. Here’s the interesting thing with our discussion here on diversification, you can see that the high frequency strategy, even though it’s a long only mean reversion strategy, performed exceptionally well in that type of environment. If we think of what’s gone in the last few years and what the environment was back then, it’s one of volatility. Yes, in the last few years, we’ve had a little bit of volatility here and there, short periods of it. Back during the GFC, it was volatility every single day, every single day the market was swinging back then forward by a large percentage.

Nick Radge:
That’s exactly what that high frequency strategy really plays too. That’s what it likes. And that’s why just in the last, three or four or five months, it’s done exceptionally well because we have had that volatility in the market and it’s come back. This is a good example of sticking to two strategies and how one will benefit the other for whatever reason the market environment is. I think that’s a pretty good indicator of how you can put two very different strategies together, even though they’re long only, and even though they’re trading the same asset and they can work very, very nicely together.

Nick Radge:
Putting something like a trend following strategy and a shorter term mean reversion style strategy together, I believe would be an absolute base point of stock. That’s where you would start. I obviously go a lot further than that, which we’ll discuss shortly. I think for any new trainer that should be your goal. Certainly for my students in my trading system mentor course, that’s the goal I want them to achieve. To have at least two systems working together, not correlated. The correlation between these two is 0.22. That’s pretty good. Long only equities 0.22. That’s pretty good. Right?

Andrew Swanscott:
How often do you measure that correlation? Do you review it periodically?

Nick Radge:
Well, I look at it for the longer term. I’m not allocating funds to one or the other based on, the correlation or the returns or anything like that, they both have an allocation and that allocation stays through thick and thin. For example, back there during the GFC, when the growth portfolio went into cash, I didn’t take that money out and do something else with it. I didn’t allocate it to this high frequency strategy. That’s the allocation to that strategy, and that’s the way it stays. The fact that it sits in cash is actually part of the strategy itself. Yes, we can earn some interest on that. You could do something else, for example, put it into some a bond ETF, something like that, to get a little bit more out of it. But at the end of the day sitting in cash was a pretty safe way to be.

Andrew Swanscott:
Yeah. Yeah. Well, flat is a position too, right? I think, especially beginner traders, I just want to get in and they want to do lots of trades and make lots of money. As you mentioned there sometimes the best position is just to sit back, let everything blow over and then jump in later on. That’s a good example there. I want to dig into a little bit more about why not short systems as well. You did touch on a point about borrowing and things that can happen, especially during times of crisis. Is that the main reason why you don’t explore short or is there something else to it? Why don’t you also diversify between long and short?

Nick Radge:
Look, you’re absolutely right. I think that is a failure of mine to actually pursue short side systems. Certainly some of my students in the trading system mentor course are now trading short side systems. Excuse me. And you said something that I’ve really got to get my ass into gear and get working on. I’ve got no problems trading on the short side morally or whatever else, it’s certainly plausible. I would only do it in the US market. I wouldn’t do it in the Australian market. But it’s just not something that I’ve got around to as yet. I’ve not really had too much success in designing short side systems that meet my benchmark. I’ve got certain benchmarks that I like to have and I have not come up with a trading or short side trading system that really meets those benchmarks accordingly. Until I get to that, I just aren’t going down that route.

Andrew Swanscott:
Yeah. Okay. We’ve actually got a question in the chat from Ola, which is, just touches on something you just mentioned. Let me show it up on the screen here. As strategies ebb and flow in performance. How do you allocate funds between them?

Nick Radge:
Okay. As I just mentioned I don’t move money between strategies if one’s going to cash or whatever. It’s not like I take the money out and throw it into another one. I allocate based on a few different things which we’ll get into. We talked about signal dilution before, signal like dilution, and that’s one of the reasons. But generally, if a strategy gets so far out of whack with the other strategies. I can and will move funds back the other way if you like. That’s going on in one of my slides, which we’ll see soon. There is a disparity with my micro cap portfolio in Australia compared to the others, mainly because this year it’s had a cracking year. I think it’s up 59 or 60%. At the end of this year, I’m going to have to rebalance that portfolio again. But I don’t do it on a very regular basis. It’s only when that really get out of whack.

Andrew Swanscott:
Okay. Another question here, actually from, this one’s from Geo. The problem with trading the US markets, this is obviously for Australian or outside of US, can be at times that you can lose or win with the currency exchange movements. How do you manage that difference there?

Nick Radge:
Yup. Well, the main area where that becomes a threat is if you’re holding long term positions, which I do do, and very easily, we hedge that away using currency futures. I’ve got a hedging mechanism if you like. It’s a pretty simple strategy that I use on the Aussie dollar. When that triggers, we put on a hedge by buying Aussie dollar futures. And that way we alleviate the risk of the FX. It’s a simple strategy. It doesn’t have to be difficult. It’s not a straight trading strategy in and of itself. It’s a hedging tool. That’s the way you overcome it.

Andrew Swanscott:
I trade futures exclusively now, and my trading accounts are in US accounts, in US dollars. The exchange rate especially can move quite a lot over the course of a year between Australia and USA. It’s definitely something to keep in mind for traders who are trading markets that are not in their home currency, I guess. Definitely something to look out for.

Nick Radge:
The simple premise is that, when the Aussie dollar rises and you hold US dollar assets, you’re going to lose money on that. That’s why you would buy Aussie dollar futures, and that would hedge it for you. Yeah, absolutely. That’s the cheapest way to do it as well.

Andrew Swanscott:
Yup. Now, we’ve just gone through, you’ve mentioned diversification across markets and also stylistically, I guess you could say, but I know you’ve got some more slides to share with us. Do we want to move on to the next one?

Nick Radge:
Yeah. This just gives you a bit of an idea of the country allocations that I currently have. Predominantly I’ve recently reweighted more into the US. I was predominantly in Australia, but over the last few years, I’ve now balanced that out. Try and get it to 50, 50. As I said, I will be hopefully adding Canada to the mix at some stage. And depending on account structures and that kind of stuff, will depend on how much I allocate. When I say account structures, I have money sitting in three different brokerage accounts, under three different entities. And depending on some of those entities, for example, my retirement account, there’s only so much I can do with that. I can’t day trade that money. That’s going to be limited as to what it can do.

Nick Radge:
And as that account grows, it might grow out proportionally to the other ones. It just depends. That’s the current allocation, you can see it’s about 50, 50 Australia, US. I’m looking to add Canada at the end of the year as well, which from my very, very, very early research on it, should show profile similar to the models that I trade in Australia, we’ll see.

Andrew Swanscott:
Is that the main reason why you chose Canada?

Nick Radge:
The main reason why I chose Canada, is because that’s where the accurate data is, put it that way. With our systems, we want the most accurate data. We’ll use Norgate data and it has historical constituents that enables us to be able to test our systems without any survivorship bias or anything like that. So very, very accurate data. And they’re about to probably introduce data for Canada over the next couple of months, which would be fantastic.

Andrew Swanscott:
I know we get a lot of viewers and listeners in the States, who may not want to go to Australian markets. Do you think Canada is a good choice for them? Or how else can they diversify against the US markets?

Nick Radge:
Well, the key would be to use different strategies in the US market. And again, some of these slides that we’ll go through here, you can see how I do it across the Australian market and the US market. I guess, no disrespect to our friends in the US, a lot of the time, they don’t think there’s anything outside their own borders worth trading, but there is, and Canada might be one of those markets they can look at. Certainly a much more smaller market that’s for sure. Certainly a resource based market like Australia. There could be some opportunities there.

Nick Radge:
Look, it’s up to the individual, all this diversification comes down to your willingness to be open to that stuff. It also comes down obviously to time and capital, if you have that much capital then diversifying across multiple strategies may not be an option, but certainly I think trading outside your home country does offer benefits and Canada would probably offer us clients some benefit, that’s for sure.

Andrew Swanscott:
Yeah. Yeah. That’s a good point. Got a question here from Zach. Zach would like to know, have you ever trend following equities and futures portfolio?

Nick Radge:
My first 17 years of trading was futures. I was a fund manager, ran my own commodity trend following fund. I wound that up in 2001 for a variety of business reasons rather than anything else and moved into equities. That growth portfolio that I showed you earlier on, which was my main trend following strategy for my retirement account. That was originally my trend following strategy for my futures trading. I simply took the exact same model, made one adjustment to it and have been trading that on equity since 2001. Now, I personally don’t trade futures from a trend following perspective anymore. That’s just a personal choice. I do trade futures from a hedging perspective, reasonably rarely, but it does happen.

Nick Radge:
It’s certainly something that one could look at. I certainly have no problems with futures, but I’m just happy with equities. Maybe that’s a function of age, whatever, but it certainly could be something to be investigated, that’s for sure.

Andrew Swanscott:
Yeah, yup. I’m obviously-

Nick Radge:
Sorry. And alternative and easy way to do it would be to invest with one of these managed futures companies who have been around for 20, 30 years. There’s a few mutual funds out there now that give you access to that, that didn’t back in the day. And there’s certainly a lot of a lower entry bar if you like, to try to portfolio, diversified portfolio of futures, really, you’re looking, you’d need at least 400 or $500,000 to really give that a proper go, I’d say.

Andrew Swanscott:
I’m obviously biased towards futures, because that’s what I trade. But I think personally it’s easier to get diversification because a lot of the markets have different characteristics and personalities. I think especially when we have times of crisis, a lot of stocks will just correlate and will meet. Me personally, I think it’s easy to get diversification in futures, but you might think otherwise.

Nick Radge:
Well, look, this is an interesting topic. Okay? Because there are certainly a group out there that espouse that the only way to diversify is to have a broad base of futures contracts. Here’s two things with that, right? Here’s my problem with that comment, one, are we now trading just to diversify or are we trading for good risk adjusted returns? Because at the end of the day, my view is everyone comes into trading to make money. I’m pretty sure that the Turtles weren’t talking diversification 30 years ago or 40 years ago, it wasn’t even on the agenda. They were purely and simply trading to make as much money as possible. Their whole regime has now changed. It’s all about diversification now. It’s all about this key market risk and that kind stuff. I’m not entirely on board with that kind of talk, quite frankly.

Nick Radge:
The other thing is, assuming we are training for good risk adjusted return. Let’s compare my our returns to that of a completely diversified trend following commodity fund, because mine are better. At the end of the day, a lot of these guys are producing 12% annualized returns, maybe 14% annualized returns with 30, 35% drawdown. Now I don’t know mate, if that’s the end game, what exactly is diversification providing you? That’s my point. You can get better risk adjusted returns trading long only equities, than what you can with that. That’s the truth of it. It sounds good in theory, I get what you’re saying, in theory, it makes sense, it makes logical sense. But in reality, that’s not really what’s happening.

Andrew Swanscott:
You make some good points there, Nick. I know we’ve got some more slides to go. There’s been a couple of comments while you are talking there. I just want to raise here. Adam Janson made a comment, that the personality of the futures market is really the psychology and thus personality of the trader. What do you think about that?

Nick Radge:
Right.

Andrew Swanscott:
Is that coming?

Nick Radge:
Yeah. That’s fine. At the end of the day, we’re here to make money. I haven’t met one person who wants to get into trading for any other reason than to make money. That reason may change over time. It’s like this argument that people take profit, scale out. Really? Mathematically it’s the worst thing you can do. At the end of the day, we come into this game to make as money as possible. Okay, I get it. It might make you feel a little bit more comfortable. It might smooth your equity curve, whatever. But at the end of the day, the basic foundation is we are coming into this to make as much money as we can. Okay? That’s really what it’s all about.

Nick Radge:
Do the futures markets operate from a different personality level or psychology? I don’t know. At the end of the day market is market, participants are participants. They’re human beings. They’re all going to operate the exact same way. Look at lumber, we’ve had this massive trending and a massive collapse. Crude oil, massive collapse, big trends back. It’s same old, same old, markets are markets, and they playing by the same participants.

Andrew Swanscott:
One more question for you before we move on. This one is from Skousend. Do you consider the volatility of your strategies when deciding your allocations?

Nick Radge:
I don’t, no. I don’t look at volatility. It’s not one of the metrics that I do look at. I’m looking at the correlations between the different strategies. I’m looking into the different styles, which we’re about to go into here. I guess the main metrics that I look for, and again, I mentioned earlier on that I had two benchmarks that I try to get towards those two benchmarks are first and foremost, I’m not going to touch a strategy that has an annualized return of less than 15%. Everything I want to try, it has to have an annualized return in excess of 15%. The second benchmark is, I want a strategy with a MAR ratio of at least one. Now I’m happy to follow up. Those that don’t know what a MAR ratio, it’s your annualized return divided by your maximum drawdown, over the history of the strategy.

Nick Radge:
For example, if I’ve got a strategy that has a 15% annual return, I really want the maximum drawdown to be a maximum of 15%. That’s MAR ratio of one. Trend following momentum strategies, I’ll give that a little bit of leeway, 0.8 0.85, something like that. But I’m not going to go and try a strategy that has a MAR ratio of 0.3. They’re the two benchmarks that I look for. Drawdown is important to me. I don’t want to have any strategy that has really, really deep drawdowns. We’ll talk about that hedge tool that I sent you a slide on as well, which, my biggest concern has always been another 1987. I was trading in 1987. I blew up in 1987. So ever since that’s been my biggest worry and I believe what we’ve just seen here in March, is or was the equivalent of 1987. Overcoming those kinds of risks are also very important.

Andrew Swanscott:
We’ve got a lot of other questions, but I want us to keep moving on, because I know you’ve got some other great stuff to share. We hit the slide. You were just talking about country allocation.

Nick Radge:
Yup. Okay. This particular slide here is the style allocation if like. Now, I am a trend follower. I have been literally since day one. During the GFC however, when all my trend strategies went to cash, I started investigating other strategies that could basically take their place if you like. And that’s when I started looking at mean reversion style strategies and so on and so forth. What we’ve got here is, we’ve got ASX absolute trend following. Absolute trend following is when we’re looking at standard trend following that you would read about from one of Michael Covello’s books, something like that, Jerry Parker style, Turtle style. We look at the individual markets on their own. All I’m doing is I’m looking at individual stocks on their own. I’ve written a book, Unholy Grails, which outlines eight different trend following style strategies.

Nick Radge:
I trade one very similar to one that’s in that book. Relative momentum. Now this one is very new for the ASX for me. It’s only just been introduced. Relative momentum is when we compare the momentum of stocks against each other. I might be looking at a basket of 500 stocks. I’m going to be asking the question, which one of these is trending up and then put those in a basket. And then I’m going to say, of these ones that are trending up, which ones are trending up the best or the fastest, if like, has the most momentum. Then we’ve got US relative momentum strategies. I trade a couple of these, which we’ll get into very shortly, same kind of style. These are a weekly and monthly rotation style strategies. The US mean reversion, that’s one that I started trading back in 2010 from my research.

Nick Radge:
Still trading that once a day. So that’s the high frequency strategy. It’s got an average hold period of about three days. And then in more recent years of going down a different level to even day trade strategies as well, just in the US market, some of you might be thinking, well, this is a lot of work, but a lot of that is automated. I did give you an idea with the day trade strategy. I’m not watching the market. It’s being run by an API. All I do is put my account balance in my computer, push a button. It does the position sizing. It generates the orders, the orders get uploaded to an API and up to the broker platform. And then the API manages it through the night, when I wake up in the morning, I’ve got a P&L sitting there and that’s it.

Nick Radge:
We’ll break these strategies down a little bit further, but basically what we’re doing here, is we’re diversifying across different countries. We’re diversifying across different styles and also across different timeframes. We’ve got positions here that can last up to nine months, 10 months on average. And then we’ve got the day trade strategy, which holds positions for, just for a few hours. All of them have positive expectancies over the longer term. And they’re all doing very, very different things. Some of them use regime filters, which we’re talking to Cesar last week about, others don’t. So the short term ones that have no regime filters whatsoever, they trade all the time. They are long only strategies, but they do try during bear markets as well.

Andrew Swanscott:
Okay. Just looking at this slide on style allocation, there’s a lot of different styles there. Where would you recommend people who are just going to get started? You’ve given a lot of options there, could seem a little bit overwhelming.

Nick Radge:
Yeah, absolutely. First and foremost, and this is my biased opinion, I am a trend follower. Most of my money is allocated to trend following/momentum style strategies. And to me that’s just the easiest way to make money in the market, in terms of creating a positive expectancy, really trend following, cut your losses, let your profits run. I’m not saying they’re easy to trade psychologically, but from a mathematical perspective, I believe that’s the place where people should get involved, because it’s very hands-off, very low commission drag. And it’s very easy from a lifestyle perspective to actually try to trend following strategy. Some of mine are monthly strategies, where I actually don’t do anything at all for the whole month.

Nick Radge:
Place the orders at the start of the month, don’t look at it, repeat the process next month around. Creating a positive expectancy or that age is the number one thing, regardless of the style of strategy. I think trend following personally is the easiest way to achieve that. So a trend following strategy. If you still knew, what I would suggest is, look at trend following strategy, and then in six to 12 months, once you’re happy with that, then look to add a secondary complimentary strategy such as a mean reversion or something like that.

Andrew Swanscott:
Yup. Yup. Okay. Just one question here. I think you may have touched this a little bit already. This is from Ola. Ola would like to know, would your rotational strategies use cash as an option?

Nick Radge:
Okay. I’m assuming, do they go to cash during a bear market? The answer is, yes. But you could include a bond ETF. In the US market, the longer bonds are certainly the better ones. So what is it? The TLT, the longer, it would set at 20, is that the 20 to 30 year bond? The TLT. It would add value instead of just going to cash, especially in this environment.

Andrew Swanscott:
Okay. All right. Let’s continue with the slides. We’ve got a few more to get through, so that one was style allocation. Okay.

Nick Radge:
All right. This one’s getting a little bit more complex. This basically breaks down all the different strategies that I personally trade. This is probably a point, Andrew, we should start talking about signal luck. We talked about this a couple of days ago. I think it’s also good to have a discussion about this in light of you are speaking with Cesar last week on regime filters. Signal luck is, and I look at it from a very big picture perspective. Signal luck, how can I explain this easily? Let’s think of this year. Let’s think about what happened in March. Let’s assume we run a monthly rotational strategy. We’re 100% long equities, and March comes along now. In my view, March was very similar to the 87 crash basically, caught a lot of people off guard.

Nick Radge:
A lot of big money managers lost a lot of money. The markets across the board became very, very correlated, regardless of the asset price. And as a result, the smartest guys on the block lost money. Now, signal luck is having some exposure to that market or not. So to give you an idea, I exited all my long positions in the US on the 1st of March, it was just the lucky. My regime filter switched off and I was able to be in cash when that market collapsed. Obviously when the market rebounded, I got back in again. Now to give you an idea on how lucky I was, and it was only luck and we’ll use Cesar’s discussion last week on regime filters. Let’s say you’ve got a rotational strategy that uses a 300 day moving average as a rotational filter.

Nick Radge:
If the market is below the 300 day, you switch off and you exit all positions. If the market is above the 300 day, you stay invested. Okay? Now Cesar did mention that he just uses broad numbers, and I completely agree with him in that context. Okay? So 300 a round number. But if you had been using a 280 day, now just on that, if you had been using a 300 day moving average as your regime filter, you would have been invested and held onto your positions through March, and you would have had a 30 or 35% drawdown. However, had you been using a 280 day rather than a 300 day moving average, you would have exited all your positions on the 1st of March and you would not have had that significant drawdown. And that is what I’m talking about in terms of signal luck. Okay?

Nick Radge:
The difference between a 280 moving average and the 300 day moving average in the scheme of things, is nothing. But in this one instance, it was absolutely everything. Does that make sense?

Andrew Swanscott:
Yeah. Absolutely.

Nick Radge:
Okay. We can extrapolate and dilute that risk. We can never remove the risk. Okay? Markets are risky. That’s why we get return from, okay? If you don’t want any risk, stick your money in the bank, I can guarantee you won’t make anything either. There’s various ways we can actually dilute that risk. One of the ways we can dilute the risk, for example, using a rotational strategy in the US, if we have a look at the ones on the screen here, we have that US TLT premium portfolio. Okay? That is an aggressive rotational strategy that I trade on the NASDAQ 100. This year, that strategy is up around 61%. And to alleviate that risk of what we saw at the start of the year, it operates on two sub portfolios.

Nick Radge:
Half the money in that portfolio gets allocated to a monthly rotation and the other half trades the exact same strategy, but on a weekly rotation. What we’re doing is, we’re diversifying the actual signals inside the exact same system. That takes, that removes some of that risk of capturing the big downdraft at the start of the month. There’s nothing worse when it’s the fourth day of the month, you’re fully invested and the market starts cratering. You think, oh gosh, I’ve got to sit here for another 20 days. This market can fall a long way in 20 days as it did in March. Whereas if you go to weekly system, you’re going to remove some of that because the system will get itself out. So that’s an example right there.

Nick Radge:
Another one, for example, my retirement account, for the last 15 or 20 years it’s traded a single strategy. Okay? That growth portfolio that we can see there. Now, that account got to a significant size, so much so that I thought, well, hold on a sec, am I being too reliant on this one single strategy? I decided to diversify away from that. Within my retirement account, I put half the money, kept half the money in that growth portfolio. That’s been running at about a 16% annual return for the last 20 years or something. But I also put half of the money into a weekend trend trader, which is a completely different strategy, trading on a different part of the ASX. And again, it’s to diversify.

Nick Radge:
Now, to give you an example, this year, the growth portfolio is up about 4%. The weekend trend trader is up about 50%. Two completely different parts of the market, two different strategies, they both trend following strategies, but one is a breakout or the both breakout strategies I guess, but one is weekly, one is daily, and trading different parts of the market as well. One trades mid caps, and one trades micro caps. It’s just about diversifying the risk of being exposed to a single strategy if you like. You can see right across the board, I’m doing all sorts of different things, different markets, different timeframes, different strategies, and that’s the sole reason to do it. But I stress again, that to some, this may appear to be a heck of a lot of work, but a lot of it’s automated. It really doesn’t take too much. I would spend no more than 10 minutes a day operating these strategies.

Andrew Swanscott:
I think this signal luck delusion is a really important topic to consider, enough that we were chatting about it the other day. I was thinking about how can I, not just in a portfolio sense, but all across the different aspects of trading, where are the areas where I’m relying on luck? You think about it, there is a lot, there’s like, in your entries, you’ve got figure out indicators, what parameters do you use? When do you start back testing your strategy? Because you move that forward or back, it can get very different results. When do you start trading strategies live? You shift it by a month or two, you can get very different results.

Andrew Swanscott:
I think it’s interesting to consider, because it makes you assess your process more and look at things from a slightly different angle. I’ve come up with a number of different ideas for myself which I’m going to test. But I think you raise an important point that people don’t really consider that much. And that is the impact of luck on your strategies and what you’re doing.

Nick Radge:
Well, there’s a really good book by Morgan Housel that I’ve just finished reading it’s called, The Psychology of Money. It’s relatively new. It only got released last month, I think. He makes the same points on a bigger macro scale. We look at Warren Buffet as the world’s greatest investor and that may be the case, but is he just an outlier or is he just in the right place at the right time and the right environment? Same with a lot of these commodity trend following guys, you think about it, they had very, very early success in the 80s and in the 90s, but now with interest rates at zero, it’s a very, very different game for them. Was their early success just luck? These kinds of things.

Nick Radge:
I’m not saying that it is, but I think there are risks there that you can’t see until after the fact. The whole idea here is to diversify as best as you can across strategies, markets, whatever, and even right down to signal timing. I think that’s the way to go.

Andrew Swanscott:
Yeah. Yeah. Do we want to continue on with the slides? I’m not sure how many we have left there. Sorry. I can’t see.

Nick Radge:
Let’s just go to this last one if you like, Andrew, on this page two.

Andrew Swanscott:
There we go. That one there?

Nick Radge:
The S&P 500. Yeah. This is one area that I had been working on to alleviate the risks. As I said, my biggest concern was being fully invested when a 1987 come along. Now obviously diversifying different systems can alleviate that. But the other obvious thing was if we’re going to hold positions from a month to month basis, do we have some a hedge in place? This is a hedge tool that I’ve been working on for a couple of years. The biggest problem I’ve been finding to get a hedge on, is being reactive. I didn’t want to be reactive. I wanted to be proactive. I wanted the hedge to be on before the market rolled over, not once the market rolled over, because generally it’s the initial sell-off that creates all the damage, especially when you’re trading updated stocks, NASDAQ 100 as an example.

Nick Radge:
This hedge tool was designed to be a little bit more predictive. It’s not perfect, but you can see here on the chart that the signals come just before the big sell-offs come. And interestingly, we had some signals back there at the end of August. At this stage, it’s still unfolding to see where we will going now. This is based on a couple of different breadth indicators and a couple of different technical indicators. It’s a warning sign if you like. So this could be helpful for people that run monthly strategies, that could be exposed for full month. Obviously, one way we can dilute that, is by having weekly signals in there as well, but this would be another way. The whole idea here is, we get a cell signal or we get the H signal layer where it’s high risk. You might want to be able to hedge some of your portfolio, 50% of it or something like that. And just take some of the sting out of it, if we do get a sell-off.

Andrew Swanscott:
Looking at that chart there, it looks there could potentially be a long way to go from here. What are your thoughts about what could be on the horizon?

Nick Radge:
Look, I’m not one to predict. I remain 100% long equities in the US. I think quite frankly, it’s going to come down to what’s going to happen with this election. I think we’re probably going to have some sideways trading for the next month until the election is done and dusted, and that will then give us some room to move one way or another. Bigger picture, I’m super bullish US equities for the next 10 years. I’m super bullish, I think technology is really the new industrial revolution. I think we’re just right at the tip of the iceberg. And I think if anything, this COVID-19 has really pushed that forward. Look at us here on Zoom doing this now, that’s now the go-to thing. I think a lot of other businesses around the world, technology side of things is going to come to the frame. Super bullish, bigger picture, but that’s not going to come without hiccups along the way. That’s for sure, like every secular bull market does.

Andrew Swanscott:
Yup. Yup. Okay. I’m conscious of our time. We’ve got a load of questions here. I’m just going to scan through them quickly and fire a couple at you. Since we were just talking about luck, let’s have a question about luck from Ola. With regards to signal luck, how do you test a strategy for robustness?

Nick Radge:
Well, we run quite a lot of robustness tests. We do a couple of different things. For example, we do trade skipping, Monte Carlo simulations. We do variance testing. So for example, let’s say your strategy relies on the closing price. What we would do is adjust the closing price by a random amount, one, two, 3% on a random basis, run the system again and see what it looks like. We do all these kinds of things to test robustness. We’d also look at the parameters themselves. We would optimize the parameters not to find the optimal parameter, but to plot the performance of each parameter to make sure we’re trading parameters that are robust, that is they sit in a statistically significant area. There’s all sorts of exercises we do.

Andrew Swanscott:
Okay. Excellent. Thanks Nick. Christian here from AL. Have you considered using inverse ETFs to trade short using your long only strategies?

Nick Radge:
It’s an interesting take. I haven’t. My only issue with doing that, and that’s certainly worthwhile investigating, but my only issue is that a lot of these ETFs have very limited history. When I’m testing outright equities, we can go back, 60, 70, 80 years. But a lot of these ETFs, especially in Australia have very, very limited history. I’d be a little bit concerned about that, but it’s something worthwhile looking at, that’s for sure.

Andrew Swanscott:
Yeah. Yup. Question here from Zach, actually Zach’s posted a couple of questions. I might just pick this one. Has autocorrelation ever been a hindrance or a benefit to your trend following strategies over time?

Nick Radge:
Well, serial correlation is what it’s all about. At the end of the day we are trading highly serial correlated strategies or markets. There’s no doubt about that. But by adding the different strategies in there and having the defensive mechanisms in place. I train following strategies going to cash, during bear markets, you can get really good risk adjusted returns. It’s a problem, but every strategy has a problem somewhere in it. We’re aware of that. I don’t think it’s a major issue. It hasn’t been a major issue. You can certainly have some interesting thought processes during different periods. When Trump got elected back in 2016, I was 100% long US equities. I was sitting here watching the US futures go limit down, thinking, well, this is going to be a very nasty day tomorrow. But we finished November up 10% because the market turned around and just went straight up again. [crosstalk 00:57:40]. Never know what’s going to happen out there, you just got to follow those trends.

Andrew Swanscott:
Yup. Yup. Another one from Zach actually, which brings up a point you just touched on a little bit previously. Suppose you back test your strategy entry and you find a cluster of similarly performing breakouts, say between 30 to 40 days, can you randomly select a breakout day to reduce curve fitting? I guess the role of luck as well, perhaps. Go on, sorry.

Nick Radge:
Well, if you’ve got a nice cluster between 30 and 40 days, you’d go straight in the middle. You just go straight to day 35 and use that. You could use a variety of different days if you wanted to. I think that’s called swarm theory. But the problem with us retail traders, is that if you’re going to have multiple signals like that, you’re going to have a lot of execution going on. You’re going to have a lot of brokerage drawing on the account. But using a 35 day breakout, right in the middle of that cluster, and then reviewing that on a semi-regular basis. You wouldn’t want to go and review that every week or every month for that matter. But probably once a year, you would want to reoptimize and see if the market hasn’t changed a little bit.

Nick Radge:
Markets change. A lot of people say the total strategy doesn’t work anymore, but total strategy, the breakout behind it works perfectly fine. It’s just the 20 day breakout doesn’t work anymore. Markets change over time and you have to adjust the strategy accordingly, but you don’t over adjust it. Our long term trend following strategies, we would only adjust once a year if at all. The main one, which I’ve been trading since the 90s, I think we’ve only ever made one real adjustment to that in that whole period of time, it’s the exact same strategy. Robustness is very, very important. All our systems have very many minimal inputs. They are quite rough around the edges, and that’s what makes them robust. With that roughness and that robustness, you do have a bit of a bumpier equity curve, which is why I add other strategies to it.

Andrew Swanscott:
Yup. Actually, a question that just come up in regards to changing markets from John. With evolving markets and influences, is it helpful to back test decades in the past?

Nick Radge:
Look, that is a really good question. I’m not sure I have the best answer for it. I limit on my back testing, back to 1995. One could argue going back before 2000 was probably problematic, especially in the US market where tick sizes were different back then. We went into decimals. One could argue that what was going on back then is not really appropriate today, in terms of market structure, market facilitation, technology, all sorts of things. But I do to like see how my systems perform over extreme market conditions. So going back to 1995, you’ve got things like the tech bust, you’ve got September 11, you’ve got the bear market, 02, 03. You got the big run up to 07, you’ve got the sustained bear market of the GFC. You had some big sideways periods there in 2014, 2015. There’s a lot of stress tests in there, that you could certainly put weight against, but I never really go back to the fall of 1995.

Andrew Swanscott:
Okay. Excellent. Thanks Nick. Now, I’m conscious of our time. I think we should start wrapping up now. There’s been quite a few questions in the chat, which we can’t get to all today, unfortunately. Nick, so if people want to learn more from you or getting in touch with you. How can they do that?

Nick Radge:
My main website is thechartist.com.au. Or you can go to nickradge.com to get a look at all the different things we offer. Or you can drop me an email [email protected], happy to answer any questions. Or follow me on Twitter, actually is the best social media platform @thechartist. Happy to answer questions there as well, Andrew.

Andrew Swanscott:
Okay, great. Well, I just want to share some feedback we’ve getting in the chat. One from Landon. Nick just wanted to say thank you. The concept of a portfolio of strategies has helped tremendously. You’re welcome, Landon. Here’s one from Vijay. Nick, thanks a lot for sharing your knowledge over the years. The concept of diversification of strategies and diversifying signal luck is pure gold. I completely agree. One more to finish up. Zach Corum. Great answers, Nick, thank you. Your research really helped me develop my strategies over the years. I owe you a beer next time. I’m in Australia. That sounds great. Cheers mate. [crosstalk 01:02:59].

Andrew Swanscott:
Thank you very much, Nick. Now I just want to do a couple of quick announcements on myself and then we’ll have a final word for you. I just want to announce next week we have Steve Ward, who’s going to be joining us. Steve is from Trade At Your Best. He does a lot of performance coaching with hedge funds and CTAs and things like that, money managers. He’s going to be here talking to us about flexibility in trading, which is, I think an incredibly important point for traders to consider. Now, the thing with this one is, because he’s in the UK, we need to adjust the time. We’re going to move it forward by a couple of hours. It is going to be, next week it’s going to be at 3:00 PM Central. I think I’ve converted the time zone differences correctly because there is some time zone changes as well over the next week.

Andrew Swanscott:
3:00 PM central, which is going to be 7:00 AM, Australian Eastern time and 9:00 PM UK. So that’s next week, just next week only then we’ll go back to the normal time. 3:00 PM central 7:00 AM, Australian Eastern time and 9:00 PM UK time. Make sure you join us for that one. Probably the best thing to do actually is, if you go into YouTube and you subscribe, then you’ll get notifications and YouTube will actually work out the times for you. I hope I got those times right, because it gets a little bit tricky. And then one other thing actually, on theempoweredtrader.com, which is for those people who don’t know, is a monthly newsletter I publish with a couple of other traders.

Andrew Swanscott:
It is a printed newsletter like this one, this is actually next month’s issue. It’s talking about parameterless filters, which are filters that have no optimizable parameters. Potentially reduce the instance of curve fitting. That’s empoweredtrader.com. It closes in a couple of days, because then it goes to the printer to be printed out. So empoweredtrader.com and then Nick, you can get in touch with Nick, from thechartist.com.au. Any final words, Nick, before we finish up today?

Nick Radge:
No, just take the long term view of it. That’s all, this is not a race, it’s a game of survival. And as like I to say, next thousand trades, that’s what it’s all about.

Andrew Swanscott:
Yup. Yup. Absolutely. All right. Well, we’re getting a lot of thanks in the chat. Thank you again, Nick, is really great talking to you and a lot of the stuff that you, all of the stuff that you said actually was really helpful and I’m sure lots of traders, looks like they loved it. I can see all the chats going through. Thanks again and all the best in the future. Cheers, Nick.

Nick Radge:
Okay. Thanks Andrew.

Andrew Swanscott:
See you.