System Combinations

By combining systems like Andromeda together with Pegasus you are not only diversifying across different markets, but also different systems and most importantly different time frames. Andromeda is a longer term, trend-following system whose average trade lasts 45 to 50 trading days, while Pegasus is an intermediary term system that aims for the intermediary term swings within a trend. By comparison, its average trade lasts 20 to 25 trading days. Combining the two systems results in a dramatic increase in profits in addition to smoothing out the equity curve. Combining systems is clearly the best option of all. Furthermore, system combinations with Position Sizing (money management) applied to trade multiple contracts for large accounts, compounds returns and grows the account exponentially at an even faster rate. Applying both System Combination together with Position Sizing / Money Managament formulas can indeed super charge equity growth.

While system combination typically reduces average drawdowns, they rarely reduce maximum drawdowns. This is because when you combine systems (any systems) eventually at some point in time both systems happen to be in a large drawdown at the same time, thus the drawdown of one system is augmented by the drawdown in the other system simultaneously. However, even in this extreme scenario, you are still benefiting since proportionately speaking, the combined maximum drawdowns of both systems together will still be significantly smaller than the sum of the maximum drawdowns of both systems independently, yet the profits will still be the actual full sum of both systems together. What this means is that while the maximum combined drawdown will be higher than that of either system on its own, the combined profits will be proportionately even greater. Hence, provided that you are adequately capitalized to trade both systems together, it is better to combine systems rather than increase your portfolio or your stake in only one system. Proportionately speaking you will increase your drawdowns a little but increase your profits a lot. Let’s look at the chart below.

Please note: the following image is for purposes of illustrating a concept and does not represent any actual performance results on any particular system or combination.

The chart above shows what usually happens when you start to add different systems. Both profits and drawdowns increase but not proportionately. Profits increase much more proportionate to drawdowns. Hence as long as you are properly capitalized it does indeed pay off to add on more systems to your trading.

Proper system combination can indeed reduce the average (typical common) drawdowns but not necessarily the overall total maximum drawdown. This is because over time the situation eventually presents itself where both systems happen to be in a large drawdown at the same time. This can happen with any combination of systems.

Examples of Andromeda & Pegasus Portfolio Combinations

*The following portfolio examples are the same ones shown in the Portfolios & Performance sample portfolios. For example, the Andromeda & Pegasus Small size 5 market portfolio would consist of Corn, Dollar Index, Palladium, Five Year T-Notes and Sugar. Please refer to the Andromeda and Pegasus Portfolios & Performance pages on this website for more information on the various portfolios compositions.

Test Conditions:

• Tested from Jan 1’st 1980 through Jan 1'st, 2012. (32 years)
• Unless otherwise noted, only net profits shown, i.e. no starting capital
• $50 deducted per trade per contract for commission & slippage
• All tests based on single contracts only

System Combination Example 1:

Andromeda Small with Pegasus Small
(5 markets in each portfolio)

The total net profits for Andromeda Small and Pegasus Small for the same time period were $285,801 and $265,470 respectively, whereas the combined profit of the two was $551,271. Meanwhile, the maximum total daily drawdowns were $18,241 for Andromeda and $19,029 for Pegasus respectively, while the combined maximum daily drawdown of the two together was $31,245. The combined maximum daily drawdown of the two together was higher than for each one independently, but much lower than the sum of the two independent drawdowns. Furthermore, the combined profits of the two together was proportionately much higher than the increase in the maximum drawdown. More importantly, as seen on the chart above, the two equity curves of the two systems merged nicely to provide evidence of a smoother curve and more consistent returns.

System Combination Example 2:

Andromeda Mid-Size with Pegasus Small
(12 markets for Andromeda, 5 markets for Pegasus)

The total net profits for Andromeda Mid-Size and Pegasus Small for the same time period were $930,611 and $265,470 respectively, whereas the combined profit of the two was $1,196,081. Meanwhile, the maximum total daily drawdowns were $31,445 for Andromeda and $19,029 for Pegasus respectively, while the combined maximum daily drawdown of the two together was $38,117. The combined maximum daily drawdown of the two together was higher than for each one independently, but much lower than the sum of the two independent drawdowns. Furthermore, the combined profits of the two together was proportionately much higher than the increase in the maximum drawdown. More importantly, as seen on the chart above, the two equity curves of the two systems merged nicely to provide evidence of a smoother curve and more consistent returns.

System Combination Example 3:

Andromeda Mid-Size with Pegasus Mid-Size
(12 markets in each portfolio)

The total net profits for Andromeda Mid-Size and Pegasus Mid-Size for the same time period were $930,611 and $792,558 respectively, whereas the combined profit of the two was $1,723,169. Meanwhile, the maximum total daily drawdowns were $31,445 for Andromeda and $31,173 for Pegasus respectively, while the combined maximum daily drawdown of the two together was $46,475. The combined maximum daily drawdown of the two together was higher than for each one independently, but much lower than the sum of the two independent drawdowns. Furthermore, the combined profits of the two together was proportionately much higher than the increase in the maximum drawdown. More importantly, as seen on the chart above, the two equity curves of the two systems merged nicely to provide evidence of a smoother curve and more consistent returns.

System Combination Example 4:

Andromeda Large with Pegasus Mid-Size
(22 markets for Andromeda, 12 markets for Pegasus)

The total net profits for Andromeda Large and Pegasus Mid-Size for the same time period were $1,437,690 and $792,558 respectively, whereas the combined profit of the two was $2,230,248. Meanwhile, the maximum total daily drawdowns were $44,537 for Andromeda and $31,173 for Pegasus respectively, while the combined maximum daily drawdown of the two together was $54,795. The combined maximum daily drawdown of the two together was higher than for each one independently, but much lower than the sum of the two independent drawdowns. Furthermore, the combined profits of the two together was proportionately much higher than the increase in the maximum drawdown. More importantly, as seen on the chart above, the two equity curves of the two systems merged nicely to provide evidence of a smoother curve and more consistent returns.

System Combination Example 5:

Andromeda Large with Pegasus Large
(22 markets in each portfolio)

The total net profits for Andromeda Large and Pegasus Large for the same time period were $1,437,690 and $1,313,112 respectively, whereas the combined profit of the two was $2,750,802. Meanwhile, the maximum total daily drawdowns were $44,537 for Andromeda and $39,031 for Pegasus respectively, while the combined maximum daily drawdown of the two together was $70,768. The combined maximum daily drawdown of the two together was higher than for each one independently, but much lower than the sum of the two independent drawdowns. Furthermore, the combined profits of the two together was proportionately much higher than the increase in the maximum drawdown. More importantly, as seen on the chart above, the two equity curves of the two systems merged nicely to provide evidence of a smoother curve and more consistent returns.

System Combination with Position Sizing

For money management size accounts over $100 Thousand

Combining system combinations with position sizing takes it all to a whole new level. That is when you go into overdrive! Position Sizing (money management) strategies such as Fixed Fractional trading apply the concept of trading multiple contracts to generate compounded results. The result is that you grow your account exponentially. Please review the sections titled “Position Sizing Strategies” in the Portfolios & Performance manuals for a more detailed explanation of this. When you combine more than one system and then also add in position sizing you grow your account to even higher levels. This is the ideal way to trade. Keep in mind though, as previously mentioned in this manual, no matter how negatively correlated your systems are, eventually the situation will arise when both systems are in a drawdown at the same time; thus you must be properly capitalized in order to trade both systems at the same time.

Recall in the Portfolios & Performance manuals that when we applied position sizing strategies on Andromeda & Pegasus large 22 market portfolios, without capping off the number of contracts per trade, we got total net profits in the Billions! The problem with such scenarios is that at those levels you are theoretically trading millions of contracts per trade, i.e. taking on millions of contracts per position. This is totally unrealistic. We then tried to run a test applying the same position sizing strategy but this time to a combination of both systems together (on the large 22 market portfolio). The numbers were so astronomical that the simulation actually crashed our software!! This is because we were now compounding on top of compounding. That is the problem with unrealistic simulations - the numbers get out of hand. Consequently we re-ran our system combination with position sizing, but placing a cap of 100 contracts. When 100 contracts per position is hit it stays there and does not increase the number of contracts any further. Following is the result that was obtained:

• $200,000 starting account size
• risking 2% of equity per trade
• number of contracts is determined by the equity risked, but capped at a maximum of 100 contracts per trade
• $100 deducted per trade per contract

System Combination Example 6:

Andromeda Large with Pegasus Large
with Position Sizing (Money Management) applied
(22 markets in each portfolio)

This time, beginning with a starting account size of $200,000 over the 32 year period the net profits ran up over $220 Million. Combining systems along with applying money management produces the most impressive results. For more discussion on the effect of Position Sizing / Money Management, and the Fixed Fractional Trading strategy applied here in this last example, please refer to the Andromeda or Pegasus Portfolios & Performance Manuals.