Disliked{quote} Hi C, I have yet to read the posts from overnight but this sentence grabbed my thought so didn't want to lose itIgnored
Disliked{quote}"Where my current trading approach shines, as I am a diversified trend trader, is during periods of 'crisis alpha'. All the rest of the time I am involved in an incessant churn trying to protect my capital at all costs. I need to be in the market however to be able to capitalise when the 'fat tail' event arrives, which I can never predict with any degree of certainty." Perhaps I am stating the obvious to a seasoned expert in this field so apologies in advance. Fat Tails are the absolute events that take us to either Equity explosion or towards...Ignored
1. Capital backing; and
2. Diversification.
I actually do treat flash crashes also as structured events, in that the event itself is an exceptional momentum move outside of what can be defined as a normal distribution. Price action that sits in a normal distribution is what I treat as noise in terms of my trading philosophy versus the exceptions which I treat as exploitable momentum moves of more enduring nature.
Obviously I can't exploit all forms of fat tailed event however and I specifically avoid trying to trade a flash event due quite simply to the speed of the reaction required to address it. If I am already in the market and these events occur, diversification either protects me where a stop simply cannot be relied on....or if on the right side, I simply exploit them by being at the right time and place. For example I fell foul to the Swissy event while in a long trade but because only 0.25% of trade capital was applied to the trade, the slippage was only 2%.
You will find that about 80% of the systematic diversified traders in the CTA space are either diversified trend traders or more specifically momentum traders and apply exactly the same principle in their trading plan. The terms diversification don't get much breathing space on this forum....and this is actually where obtaining a definitive edge is not such a hard game like that of seeking an exploitable edge from a single instrument. Now I won't argue with others out there who think it is possible but just will say the following......An efficient liquid market by definition is one in which exploitable arbitrage is difficult to find. That is the whole purpose for markets in the first place. To provide an efficient mechanism of exchange between buyers and sellers. There is only weak alpha (or exploitable arbitrage) in an efficient market. Exploitable opportunities are greater in less efficient markets or less mature markets. Now with the rise and rise of the algo's....exploitable opportunities are fleeting instants in time and the seething mass that represents the participant structure immediately pounces on these opportunities. A single fish like us retail traders simply becomes the opportunity or quite literally the food for the balance of market participants.
Let's assume for a moment that we are not legendary traders and that there is less alpha available in the market than we otherwise might assume. How can we build this level of available alpha through real quantifiable measures? In terms of diversification this ability to magnify alpha is what is referred to as 'the free lunch' of diversification. Simply by having a diversified range of return streams (or equity curves), then provided those return streams are not highly correlated, you magnify your alpha just by being diversified as the blend of return streams produces improved risk weighted returns. Once this is achieved you can simply scale up to your desired risk weighting through position sizing. All this is through a knowledge of how to manage a portfolio in quantifiable terms. There is no 'luck or skill to this'. There is a simple recipe available that is understood by almost all portfolio managers I know....and I know a bundle of them.
So in a nutshell I exploit weak alpha from trading the fat tails, but I magnify this through diversification. I simply apply a proven recipe that is the supposed 'secret that is not shared by those 'quant' houses like renaissance technologies etc. I therefore don't need to be a legendary trader or a 'pink unicorn' who can catch a fly in his chopsticks or practice a single kick a thousand times. If you can't beat them....join them :-)
Disliked{quote} I have been staring at trends all my life... in trading and outside in life. We are followed to keeping nudging to either get on a trend or get out of a trend. Timing is critical for entries (although I would personally disagree) and for exits. Unless a Phase of a trend is quantifiable and objectively measured purely 'by data', trend trading is VERY hard imo. Human mind sees things differently even if the price is going from left bottom corner to the top right corner. Give a chart to 10 traders and you will get 10 different (and mostly in...Ignored
Remember that I am simply trying to stay alive during the normal market churn...and defining trends in the hope that some of those events will take off in the linear direction I have defined within strict momentum constraints. The reason for the strict momentum definition is not for profits...it is to manage risks....in fact almost 90% of my strategy design is to simply protect my capital and be able to survive whatever the market throws my way. My profits arise from a chance 'fat tailed event' in which momentum is exceptional.
Disliked{quote} Below is my own perspective which may not agree with many. Here it goes.... In my opinion, market or any tradeable instrument that move price over time is ALWAYS in a trend. To the naked eye, all we see if consolidation or exhaustion or compelling momentum but not the characteristics that LEAD to these movements or behavior. We see what we want to see and then react accordingly. I was shitting in the wrong hole all the time until I took a step back and quantified what constitutes a trend. Not just the trend definition because that to me...Ignored
The way I see things is a bit different to the norm in that I seek to understand the underlying processes at work and then set traps to catch outcomes that are favourable to me. Much like a hunter in the savannah or a native that sets fish traps. My trap is the particular configuration I have adopted for a favourable outcome outside the day to day churn (a spider web)....and this is what I build in my design and insert into a live market. It is empty when I insert it...but provided a condition or event occurs within it, then the design of the trap ensures I catch the result. In this case I am after fast momentum bursts in a linear manner that are outside the range of the normal distribution.Provided that the events inside that trap lead to positive expectancy which is assisted by it's extreme placement then I can lay them all over the savannah..and across any type of savannah.
Disliked{quote} If we canects it's process and what propels it to move towards it's intended direction. These questions are the Crucial Point into the realm of possibilities. After analysying 10s of 1000s of trends across 9 timeframes and across some 70+ pairs, I developed my "stencil". A Stencil is the key to trend phase definition. Here's my Stencil: You won't read about this anywhere. You are a best walking and talking encyclopedia I know of so please let me know if you have come across anyone doing a similar 'scientific' approach We discussed my implementation...Ignored
What I particularly like is that your model addresses all forms of possible general market condition and is scalable to any timeframe.
I actually think that the path taken or style of interpretation is less important than the logical consistency of your approach. If it agrees in a consistent way with your logic that is defined by your understanding....then that is the way to address it. The way to therefore improve on your logic and hence your system is to expand your understanding where you have more dots to connect in a logical consistent manner. It is an ongoing process of improvement. When the logic breaks down you then know that 'Houston we have a problem' and you then need to backtrack and identify the logical fallacy. An approach like this is a more informed way to know whether you are on the right path or not.....as many paths lead to Rome.
Bottom line is that I come from a pretty strong physics background and actually visualise the market activity not as a bar chart but as signals lying in random noise much like an electronics engineer manipulates sound waves. Each pattern is an equity curve in which a significant component of that equity curve represents a random chance outcome...however their are legitimate signals in the noise and when we start to see the signal to noise ratio rise....you know that something 'real' is going on. In a sense I do not trade the market using a visual chart....I actually trade equity curves and through portfolio management deliberately configure the desired result.
Thanks for sharing V :-)
C
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