43) Correlation Heatmaps for Trading Strategies | Reducing Portfolio Risk

Using Trading Strategy Heatmaps: It can increase your portfolio risk if you build and trade multiple algorithmic, systematic or discretionary trading strategies that are too correlated. Trading a Mean-Reversion strategy with an uncorrelated Trend-Following strategy can be beneficial because the results should be a smoothed-out equity curve. However, attempt to trade two trend-following strategies together or two mean-reversion strategies together, and the high levels of correlation could have the effect of almost doubling your drawdown, meaning the approach is counterproductive. A correlation heatmap will greatly assist you in making appropriate decisions when combining the individual components of your portfolio.

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