The Successful Trader's Guide to Money Management

CHAPTER 8Combining Forces

At this point you could stop reading and start working, but first let's take a detailed look at some of the other things you might encounter as a trader.

One theme that's definitely worth looking into is diversification, how combining various strategies improves the overall situation.

We've seen that the aim of applying money management techniques is to find the best amounts to adopt to maximize profits while limiting drawdowns to acceptable values.

8.1 Using a Combination of Systems

Up to now we've worked with a strategy that, while it certainly can't be considered excellent, is quite suitable for analyzing most of the techniques we're interested in. Now let's take a look at what would happen to the equity lines if we combined various systems.

To do so we'll use a new system, which this time is based on hourly bars, and simply buys on the breakout of the 50‐bar high and sells on the breakout of the low in the same period.

This concept, known as Donchian Channel Breakout, is one of the most classic trend‐following models found in literature, and it's based on the conviction that when a market is strong enough to exceed the highest highs of a certain period, then it is highly probable that it will continue in that direction (and therefore give us the chance to follow a long trend) and vice versa, on a breakout of the lowest lows in the same period (50 bars, in our case) it shows signs of weakness that suggests further down movements will follow (and ...