Success in the Indian stock market requires a well-thought-out strategy to ensure best outcome. Many traders in this market concentrate on enhancing performance and managing risks with a single-strategy.
However, some traders choose to diversify their approach by employing multi-strategy algo trading methods which can be instrumental in navigating the evolving market landscape.
In this post, we will discuss how a diversified algo strategy framework can help manage risks and achieve sustainable journey, much like a well-managed mutual fund.
Understanding Single Strategy Algo Trading and Its Challenges
Engaging in algorithmic trading with a single strategy can offer rapid and efficient trading capabilities, yet it comes with its own set of realistic challenges:
Drawdown: Using a single strategy in algorithmic trading can lead to significant drawdowns due to losses reducing the trading account balance.
Lack of Adaptability: Single strategy algorithmic trading heavily relies on predefined rules, making it difficult to adjust to evolving market conditions or unforeseen circumstances. This limitation can lead to less than optimal performance outcomes.
Overfitting: Overfitting the strategy to historical data poses another obstacle. This risk can result in underperformance when the strategy is implemented in real-time market scenarios.
How Diversification (multi-strategy algo trading) Reduce Overall Risks
Diversification is a risk management strategy that spreads capital over different segments, scripts, assets, sectors, or strategies to lower exposure to any single risk. This principle mirrors how mutual funds diversify. Here’s how it helps:
Risk Mitigation: By employing several algo strategies across different segments & sectors, you can reduce risks from individual market swings. If one strategy faces losses, others might perform well, stabilizing your overall returns.
Reduced Drawdowns: The diversified strategies lead to smaller maximum drawdowns & less volatility compared to single-strategy portfolios.
Long-Term Performance: Similar to mutual funds, multi-strategy algorithmic trading diversifies your capital across strategies, stocks, and sectors to achieve steady long-term growth, navigate market declines, capitalize on trends, and control risks effectively provided all strategies are well back-tested and optimised.
Multi-Strategy Deployment: An Overview
At AlgomeTech, we spot the importance & demand of implementing multi-strategy algo solutions. Here are the foundational elements of the approach to multi-strategy deployment with a few popular high level strategy concepts as example:
Multi-Strategies Deployment in Different Segments and Instruments
A robust multi-strategy framework may include:
Mean Reversion: This strategy takes advantage of the likelihood that a stock’s price will return to its average over time. For example, if a stock typically trades at ₹500 but drops to ₹450, a mean reversion strategy might buy at ₹450 in anticipation of a return to ₹500.
Momentum Trading: This approach focuses on stocks that are trending up/downwards. For instance, if shares of a technology company rise by 20% in a month, a momentum trading strategy would recommend buying into that rise.
Volatility Trading: This strategy aims to profit from price fluctuations. For example, if a FMCG stock typically fluctuates between ₹300 and ₹350, a volatility trader can capitalize on this consistent range.
Event-Driven Trading: This strategy leverages price movements following specific events like earnings reports or major acquisitions. When a company announces better-than-expected earnings, it might see a stock jump of even 15-20%, providing opportunities for algo traders to automatically capture movement of that event.
Using such strategies across the segments/instruments, including index futures, options, stocks and commodities like gold, silver etc helps to build a resilient portfolio with more dynamic system controls and risk management.
Position Sizing for Each Strategy
In any multi-strategy framework, appropriate position sizing is essential. For example,
Allocate 30% of the portfolio (₹10,00,000) to the mean reversion strategy: ₹3,00,000
Allocate 30% to the momentum strategy: ₹3,00,000
Allocate 20% to the scalping strategy: ₹2,00,000
Allocate 20% to the event based trading: ₹2,00,000
Likewise a well-planned position sizing into various strategies ensures that no single strategy can drastically affect your total deployed capital, enabling a stable trading or investment journey.
Backtesting, Optimization, and Tuning for Different Scrips and Segments
Before deploying any algo strategy, backtesting is crucial. At AlgomeTech, we help traders use advanced tools to simulate strategy performance based on logics, dynamic parameter controls and run on top of the historical data (days/weeks/months/years). This helps analyse the strategy weaknesses and areas for improvement.
For instance, if backtesting shows a momentum strategy yielding a consistent return on investment (ROI) of 15%, while a volatility strategy gives just 5%, it may be wise to adjust your allocation to favor the more successful strategy.
Example: Single vs. Multiple Algo Strategy Risk Tolerance
Let’s compare the outcomes of single versus multiple algo strategy deployments:
Single Strategy Deployment: Picture using only a momentum trading strategy. If the market shifts trend abruptly, you could face losses. For example, if your momentum strategy typically has a drawdown of 10% but experiences a market correction, that could escalate to a 15% loss.
Multiple Algo Strategies: Now consider employing mean reversion, momentum, and volatility strategies together. If the momentum strategy suffers a 15% drawdown during a downturn, the mean reversion and volatility strategies can generate profits, leading to an overall portfolio drawdown of only 5%.
Thus, using multiple strategies not only minimizes risks but also boosts resilience against market fluctuations.
Diversification is Scalable
A key advantage of a diversified algo strategy framework is its scalability:
Independent Strategy Position Management: You can manage various strategies independently, adjusting them based on market conditions.
Multiple Scrips and Segments: By applying to various scrips like Nifty Index Futures, Options, Commodities and specific stocks, your portfolio adjusts with market trends rather than relying on a single segment/scrip, which is critical in a volatile market conditions like India.
Optimizing Overall Portfolio Management
Multi-strategy algo frameworks allow for a holistic approach to managing your portfolio. You can shift strategies based on evolving market conditions and also adjust the dynamic parameter controls, aiming for both short-term gains and long-term sustainability.
Integrating different algorithms to different segments/scrips can also help traders:
Manage Drawdowns Effectively: Optimising strategies reduces the likelihood of overall severe drawdowns due to market movements.
Strategically Allocate Funds: As mutual funds allocate funds across various segments/scrips, you can optimize your quantity allocations dynamically according to how well each strategy performs in each segment/scrip in the current market conditions.
Through in-depth understanding of market landscape dynamics, AlgomeTech can help you craft a resilient, diversified and ability to optimise your multi-algo trading strategies and successfully implement in live markets.
AlgomeTech for Your Multi-Strategy Implementation?
At AlgomeTech, we offer tailor-made algo solutions designed to enhance overall portfolio performance & management. We can help with:
One-one consultation to understand your unique needs, relevant markets to uncover possibilities and opportunities.
Employ cutting-edge technology for backtesting, optimization, and strategy fine-tuning with dynamic parameter controls.
Create resilient algorithmic systems with multiple independent strategies tailored to your risk tolerance and performance expectations.
To succeed in trading in the dynamic Indian markets, you need the right strategies, tools, and skilled developers.
Level-up The Experience with Multi-Strategy Framework?
Yes, if the multi-strategy diversification framework is your preferred method to reduce risks and drawdowns in the stock market journey, similar to a mutual fund, then leverage AlgomeTech's solutions to enhance your trading potential and outperform in the market.
Get in touch with us to discuss your unique multi-strategy requirements and level-up.