Most of the modern Algorithmic traders use a combination of trading systems to generate Alpha consistently. They do implement multiple systems to make sure that the risk is diversified and they are well protected against any black swan events. For example: combining non-directional systems with directional systems provides some cushioning during volatile or sideways markets.
If you also want to use multiple trading systems, it’s important that you make sure that the systems are not heavily correlated as it would defeat the purpose. In this post, we’ll learn how to create a correlation matrix among different systems to understand how similar are those systems. The correlation of trading systems would be calculated based on their net returns, however, you can also use other parameters such as Drawdowns, Sharpe ratio, Expectancy, and so on.
A Spreadsheet is attached at the end of this post which serves as a template to calculate the correlation matrix of trading systems within a click of a button.
Learn more about Correlation Matrix
If you would like to learn more about the correlation matrix, its application, and calculation steps, please go through the below article:
Correlation Matrix of Stocks in a Spreadsheet – Automatic Data Feed
Correlation Matrix of Trading Systems: Spreadsheet Overview
The spreadsheet will serve as a one-click solution to derive the correlation matrix of trading systems.
See below the screenshot of the spreadsheet:
Interpretation of Correlation Matrix
Let’s take an example of the below correlation matrix:
Download the spreadsheet to calculate the Correlation matrix of trading systems from the below link: Correlation Matrix Trading Systems Excel Sheet The spreadsheet is created using MS Excel 2019 windows edition, but it is backward and forward compatible with other versions of excel