Combining strategies
Combine two systems and explain the drawdown change · 8 min
- Trend system
- Reversion system
They earn in different conditions, so their bad stretches rarely coincide.
Two systems each have 10% volatility and uncorrelated returns. You put half of your capital in each. The blend’s volatility is about…
Combining strategies works like combining markets. The blend's return is the weighted average of the parts; its volatility is lower than the average whenever the correlation is below 1.
Trend following and mean reversion are a natural pair: one earns when moves continue, the other when they reverse, so their correlation is often low or negative. The drawdown of the blend is usually shallower than either alone, because their losing stretches rarely line up. The catch is the same as before: correlations move, and the blend's risk is only as low as the correlation in the bad weeks.
- Trend system
- Reversion system
- Blend 50/50
| Trend | Reversion | Blend | |
|---|---|---|---|
| Volatility | 8.9% | 8.3% | 6.0% |
| Max drawdown | -12.5% | -15.3% | -9.8% |
| Sharpe ratio | 0.95 | 1.05 | 1.42 |
Correlation of daily returns: -0.01. The formula √(w₁²σ₁² + w₂²σ₂² + 2w₁w₂ρσ₁σ₂) gives 6.0% for the blend; measured: 6.0%. The blend is fixed-weight, rebalanced daily.
Generated markets, not real data. They show how a rule depends on the market it meets; they do not predict how real markets behave.
Volatility of a 40/60 blend
- Trend system, reversion system
- σ₁ = 12%, σ₂ = 8%, ρ = −0.2
- Equal-risk weights (1 ÷ σ)
- 1/12 : 1/8 → 40% : 60%
- w₁²σ₁² + w₂²σ₂²
- 0.16 × 144 + 0.36 × 64 = 23.04 + 23.04 = 46.08
- 2 w₁ w₂ ρ σ₁ σ₂
- 2 × 0.4 × 0.6 × (−0.2) × 12 × 8 = −9.22
- σ of the blend
- √(46.08 − 9.22) = √36.86 = 6.1%
System A has 20% volatility and system B 10%. Which weights give them equal risk?
Two systems of 15% volatility, correlation 0.5, 50/50. What is the blend’s volatility?
System A’s worst drawdown was 25%, system B’s 20%, and their returns are nearly uncorrelated. The 50/50 blend’s worst drawdown is most likely…
Missed questions come back for review after one day, then three, then a week.
Strategy 1 has 20% volatility, strategy 2 has 20%, and their returns have a correlation of 1. You put 50% of capital in the first and 50% in the second. What is the blend's volatility (in %)?
Hint: σ² = w₁²σ₁² + w₂²σ₂² + 2·w₁·w₂·ρ·σ₁·σ₂, then take the square root.
Three years of a fresh generated world are on screen; the next two years do not exist yet. Tune the rule on what you can see, commit to two predictions, then generate the future.
- Your rule so far
Over the next two years, after costs, this rule will…
Will the deepest drawdown after the split be worse than before it?
Generated markets, not real data. They show how a rule depends on the market it meets; they do not predict how real markets behave.