Where To Find Your Trading Edge

TL;DR

The Trend Following Community experienced suppressed volatility from 2010-2018, but a resurgence in outliers occurred in 2020 due to reduced central bank firepower.

Transcript

we have had periods of time where outliers have been few and far between the trend following Community went from 2010 up to 2018 during a fairly difficult regime of mean reversion where a lot of people were saying Trend followings did but we know that that particular regime it was a regime of what we refer to as suppressed volatility we had central... Read More

Key Insights

• 😀 The Trend Following Community faced difficulties in mean reversion from 2010-2018 due to suppressed volatility caused by central bank intervention.
• 🍃 Central banks have used up a significant amount of firepower between 2000 and the global financial crisis, leaving them with limited ability to control outlier events in the markets.
• ❎ Diversified Systematic Trend Following involves quantitative analysis of price series bias and finding markets with negative serial correlation.
• 👀 In an efficient market, there is no edge for trading, but traders look for markets that spend most of their time outside of the normal distribution of returns.
• ❓ Convergent trading methodologies, like mean reversion, focus on exploiting oscillations about an equilibrium in market data.
• ❓ Markets can shift between different states, including convergence, noise, and divergence phases.
• 🍸 Outliers in Trend Following are trades that result in tail events and significantly impact a trader's portfolio.

Questions & Answers

Q: What is the difference between traditional Trend Following and Diversified Systematic Trend Following?

Traditional Trend Following relies on visual chart analysis, while Diversified Systematic Trend Following is a quantitative approach that considers the bias in price series and looks for negative serial correlation.

Q: How does one identify an efficient market with no edge for trading?

In an efficient market, the distribution of market returns follows a normal distribution without any serial correlation. Traders need to find markets where the data spends significant time outside of this normal distribution.

Q: What is the purpose of convergent trading methodologies?

Convergent trading strategies, like mean reversion, seek to exploit oscillations about an equilibrium in market data. They aim to profit from price reaching an adverse excursion away from the equilibrium and then returning.

Q: Why are outliers important in Trend Following?

Outliers, or tail events, are highly profitable trades that make a significant impact on a trader's performance. Trend Following techniques focus on running trades in the direction of tail events.

Summary & Key Takeaways

• From 2010-2018, the Trend Following Community faced difficulty in mean reversion due to suppressed volatility caused by central bank actions.

• However, in 2020, a massive resurgence in outliers was observed, indicating that central banks have less firepower to control the markets.

• Systematic Trend Following involves quantitative analysis of price series bias, looking for negative serial correlation, and exploiting mean reversion patterns.