The Magic of Diversification (In Futures)

July 5, 2024

This week we’re talking about diversification in Futures.

Specifically, we’re looking at possibly adding Rough Rice (RR) to a portfolio.

On its own, RR beat the market easily and by a wide margin (since 2005).

But it did have losing years when rice had hard trends in one direction. Mean reversion suffers in times like that.

Is there anything we can do?

I think so.

Remember, we know Rough Rice has nothing to do with the stock market. Rice doesn’t care about meme stocks.

So what if we combine our RR system with one of our stock market systems? In theory, they should work well together.

Once again, here are the details to our system this week:

Magic Bollinger Band™ Mean Reversion RR (Daily)

• Long entry: when price crosses above the lower Band (length 55, 1.1 st dev)
• Short entry: when price crosses below the upper Band (length 50, 1.1 st dev)
• Time exit Long: 19 days
• Time exit Short: 25 days

We’ll now combine it with the 240-minute CCI stock market system using the ES.D futures contract. I track this every month on my Performance Page and gave away the details on this system in this video.

We’ve diversified. Did it fix the losing years? Did it make us more money?

Here are the Annual Returns again via Portfolio Architect for just RR:

Here are the Annual Returns when we add our stock market system:

That’s way better. We don’t see any losing years at all since 2011. And notice how well this portfolio does in bear markets? It thrives in 2008, 2018, 2020, and 2022.

How does this compare to an index fund?

The SPY would’ve turned $15k into $96,000 in this time period.

This “diversified” portfolio of two hypothetically turned $15k into $213,000.

Yikes. That’s an even bigger beat-down.

By diversifying, in Futures, we hypothetically made a lot more money.

Talk to you soon.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.