A system with higher than 1:5 risk reward ratio will have low strike rate. Only way to improve return is to distribute the risk to a basket. Now if i have 10 stocks in the basket, then all i need is 2 of them to click to ensure my capital is protected. If all 10 of them fails, then i seriously need to re-look the system.
Linkon, was looking at one of your post from weekend today.. and thought of sharing my views on it.
IMO, standard gyan of diversification,that we have read at many places and understood it.. is poor excuse of ignorance. Even portfolio management theory says that diversification beyond a level (I think > 10 securities in portfolio), doesn't benefit any more. Important is to know the Type of risk and how to manage them.
If you have 10 stocks in portfolio, u are just managing the company specific risk. You are still open to market related risk. If market goes down, all 10 stocks are going to go down.
Similarly if u have 10 types of systems, all are showing LONG positions now, that doesn't mean that u are safegaurded against mkt fall, even after 10 systems. For such protection, u need to manage +ive delta with -ive delta i.e. with some bearish position so safegaurd long positions.
Without forgetting that with diversification / hedging, you are putting break on the return.. i.e while u reduce the risk, u are paying the cost in terms of return.
Hence as smart trader, we need to understand what we are doing, what are the implication of it and when we need to apply breaks and when we need enjoy the ride.
Happy Trading