Dislikedwhat about AUD/NZD long as a potential candidate to diversify across different instruments? you`ll have to pay some swap though. RLF`s system is good, but its much safer to have about 5 different instruments to play with. old highs and lows can always be broken in the future. hedging is of course possible before price reaches the old high/low.Ignored
1. The intent is to develop a consistent income earner. An instrument that get's into a significant drawdown obviously stops income generation so you need to launch another instrument to offset and produce income. This ultimately would determine how diversified you get.
2. Yes, historic bottoms and tops are no guarantee but 0 is (eg. on a commodity like silver, gold, indices etc etc.). Therefore prioritize your selection to identify candidates which are 1st fail-safe. After that then the historic bottom or top (eg. Forex pairs) is your next best bet using the tightest grid and lowest risk exposure.
3. You need to firstly identify your maximum risk of loss you are prepared to tolerate. This will determine your position sizing and grid spacing. Yes, there is no guarantees and when your risk target is met....that's the time you need to pull the pin and accept the loss. This target is likely to be 50%-60% of your trade capital and this will severely cap your ability to diversify.
4. If it was me (a risk nazi) I would add a long only condition as well.
5. Positive SWAP while not appearing to be material, actually is to an instrument deep in drawdown...and you will notice how your equity deteriorates quickly with negative SWAP for an instrument deep in drawdown with a large position size. With positive SWAP, you can afford to park the under-performing instrument until market conditions change and over time let positive SWAP assist in reducing the break even point. It is a slow grind but worth it in my opinion. Obviously there are not many offerings with positive SWAP so you probably out of necessity need to accept negative SWAP but make sure your instrument does not have a large negative SWAP otherwise you will pay the price.
6. Fred's idea of a 5x multiplier on the initial position is a good one based on live performance as this keeps the income churning with some good licks when you choose direction well. Also if you park an instrument and get another cracking the new instrument is likely to quickly offset the drawdown impact of the prior instrument quickly. That way you can close both positions and start again simply to remove a bit of risk steam.
7. There is definitely a temptation to diversify to increase the income churn....but you just need to be very careful that you don't overexpose yourself in doing so. Instruments are getting more and more correlated these days and unless you choose wisely....it could be your undoing.
I'll let Fred tear into this post if I have it wrong. :-)