hi SweTrade,
I run my short-algos first of all because there is money to be made on short-side, so yes, first of all because they are profitable. Original idea with having profitable short strategies was different though, rather linked to diversification, rather ideal picture about diversification I have to say. I thought, maybe like many others: „wow, you can go market long and you can go market short – so you make money all the time, does not matter what the market is doing, you will have smaller drawdowns as well“. Very naive. Reality has shown different picture:
a) Short strategies, even being profitable, do not necessarily reduce max drawdown of the portfolio. It is not necessarily like that, that when long-strategies enter massive drawdown period the short-strategies are doing their best and are over/compensating the losses of longs. Though shorts-strategies might shorten the periods from one equity high till the next one. And this is not less important, I would say now (but it was not my main expectation earlier), because in fact it means „smoothing of equity curve“ and that means less risk.
b) It’s not like that, that when my longs are doing good my shorts are doing bad, and when longs are doing bad the shorts are doing good. There is no such 1:1 relation. It is in fact so, that very frequently longs doing good compensate/overcompensate shorts which are doing poorly in the same period (by „period“ i mean several weeks or few months) and vice versa. But there are periods – and that I was not so much expecting – where all (or almost all) longs AND all (or almost all) shorts make money, and the sobbering part: there are rare periods where all (or almos all) longs and all (or almost all) short are losing money. According backtest result of my current core strategies I would have had 1 month in 2018, where absolutely all longs and all short would have been losing money. Where/how/why has this f**(fantastic?) diversification disappeared all of the sudden? Something to keep in mind, because some moment in the future it will happen again, for sure.
I tnink for sake of diversification one does not necessarily need to move to other (equity) markets, and not necessarily develop a short strategy. It’s quite huge improvement in terms of diversification – when trading an equity index – if one has several really different go-long approaches. Markets have few quite different ways to go up (and few ways go go down) so it’s super cool if some of those few ways one catches by varous long-strategies. It makes big difference already compared to the case when one has only 1 long-strategy. Before diversifying to other market I would rather try to develop a short strategy/some short strategies on same market. Other equity markets, at least major ones (like US-Europe-Japan), move – I would say – extremely similarly at the same time. But having a short strategy makes a real difference. I know it’s really tough to develop a short strategy for equity indices. You fight against constant positive bias of equity markets, you are aiming to make money going short while at the same time there billions USD/EUR/JPY/GBP waiting and ready to buy „every dip“. That results in very different dynamics of market going up versus market going down. But that does not prevent an equity market from going down under certain conditions – and so there are ways how money can be made on the short side.
What you mention: „I noticed some people using barely profitable short system, together with their long system, mainly to reduce drawdowns or have a smoother equity curve“ is probably not bad idea as well. I would consider that not as „trading“ but rather as „investment“ strategy though. I can imagine that one instead of having several long strategies simply buys and equity index as „buy and hold“ investment (which makes money long term due to positive long term bias) and runs some short strategy/ies on the same index – just purely in order to reduce and shorten the drawdown periods, even if the short strategy/ies does not / do not make money long term (but hopefully they do not lose long term a lot). So shorts will reduce performance of the buy and hold investment, but if they really make the job reducing/shortening drawdown periods significantly, it’s very valuable job then still. Again, „valuable“ from the perspective of investment strategy according my understanding. In terms of „trading“ strategy I would say one needs strategies which make money long term, every single one of them, long an short.
Cheers
Justisan
