Putting More Money Where It Is Working: Dynamic Cluster Allocation
Dynamic allocation across asset clusters based on recent momentum and regime signals, overweighting performing clusters.
The Case for Rotation
V7 trades across six clusters: FOREX, METALS, INDEX, CRYPTO, COMMODITY, EQUITY. Not all clusters perform equally in all market environments. During USD-dominant regimes, FOREX outperforms. During risk-off environments, METALS shine. S36 allocates more risk budget to clusters that are currently performing well.
The rotation logic is simple: each cluster's allocation is proportional to its trailing 30-trade Sharpe ratio, with a minimum floor of 10% per cluster to maintain diversification. Clusters with negative trailing Sharpe are reduced to the minimum allocation.
Rotation Impact on Performance
Dynamic cluster rotation added approximately +12R over the full backtest compared to equal-weight allocation. The improvement came primarily from overweighting FOREX and INDEX during their strong periods and underweighting CRYPTO during its choppy periods.
The 10% minimum floor is important. Without it, the system would occasionally reduce a cluster to zero allocation, then miss the cluster's recovery because there are no recent trades to update the trailing Sharpe. The floor ensures every cluster always has some exposure, allowing the system to detect when a previously weak cluster begins performing again.
Diversification vs. Concentration
Cluster rotation creates tension with diversification. Overweighting a performing cluster concentrates risk in that cluster. S36 manages this tension through the 10% floor and a 35% ceiling per cluster. No single cluster can consume more than 35% of the risk budget, even if its trailing performance is exceptional. This bounded rotation provides the benefit of following performance momentum without the risk of excessive concentration. In FTMO terms, concentration risk in a single cluster is dangerous because a cluster-specific shock (central bank surprise for FOREX, commodity supply shock for METALS) could push drawdown past limits. The ceiling prevents this scenario.