Figure 2.11 This contrived jagged equity curve has a standard error of 2.25. The perfectly smooth equity curve has an SE of zero. The standard deviation of monthly returns is 33 percent.
curve. The SE for trading three SF contracts in $6238, and the SE for SF and TY plus CT is just $4,902, a reduction of 21 percent. Thus, adding TY and CT to a portfolio of SF produced a smoother equity curve with essentially the same nominal profits.
The relevance of the standard error is illustrated in Figure 2.11, which shows a contrived equity curve. The SE for that curve was 2.25, since it was quite "jagged." A perfectly smooth equity would have an SE reading of zero.
Diversification can be more than just adding markets. You can also trade multiple trading systems and multiple time frames within a single account. You should try to use uncorrelated or weakly correlated systems. In summary, risk control, money management, and portfolio design are important issues in designing trading systems.