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By the time you’re combining multiple systems, it’s not so much the drawdown you’re prepared to take on each system, because when you’ve pulled systems together, you’re not going to know where the drawdown comes from. You need to think about the drawdown at the portfolio level and say, “Okay, well how much total drawdown am I comfortable with?” And if you have a system that has… Let’s say your drawdown tolerance is 20%, just for argument’s sake, and you have a system that has a 30% drawdown. You can’t give that all your capital, because your drawdown will be too big for you to be comfortable with. So what you want to do is shrink it and make sure that the other system you are adding on top have drawdowns that are either less and/or at different points in time because the systems are different.

So you think about the drawdown at a portfolio level. If a system’s drawdown is too big, then you shrink its capital so that the dollar drawdown… Sorry, the percentage drawdown at the portfolio level is lower and tolerable. But that system’s drawdown in isolation doesn’t really matter. And the trick is really to understand the dynamic of each system, what market behavior causes it to make new equity highs, what market behavior causes it to go into drawdown, and think about which systems are alike, and which systems are different. And you can do that analytically by doing correlation analysis, or you can do it visually by looking at the equity curves and say, “Okay, well equity high here, and this one has an equity high here, and this one has a drawdown here, and this one has a drawdown over here,” so whether they’re the same or different. And you don’t want to stack up your portfolio with systems that have drawdown exactly the same time, because it’s not actually giving you that much.

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