Here's one for the new players sitting there wondering what are the great secrets the big players know?

We have done a LOT of work over the past two decades - on and off - on runs versus reversals in price and other data.
Some has been very fruitful and has helped us make more money or helped us opportunistically reduce the volatility of our returns. I feel that all this work qualifies me to say one slightly contradictory statement: I cannot define what a trend is until it has already happened!
For the avoidance of doubt, we are almost 100,000 trades live so we are not just sitting there wringing our hands about definitional issues. But this is a matter of consequence. The greatest model that will ever be discovered is the one that a/ defines a ‘trend’
before it occurs and b/ allows one to have a reasonable idea of its genesis and demise with that knowledge (trend or reversion) one can apply exceedingly robust risk taking techniques without the pitfalls extant in markets as we look at them today!

Now you know. We do not know.

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More from @VitruviusCurve

30 Sep
One kernel for Alpha hunters...

I would like to share with those wishing to hear, the basic experiments that I did that led to finding phenomena and regularities that I was able to systematise and apply in markets...
It is important to understand that there are no advanced concepts to be applied in the embryonic stage of alpha research and so "some will be frustrated at the simplicity".

Experiment No. 1 We need to understand the difference between reversion and momentum.
The easiest way to think about this is to look at runs and sequences of consecutive transactions in a market. It is instructive to study what is happening as run lengths increase and change sign.
Read 5 tweets
30 Sep
We used to say that the least predictive market with the tightest spreads and the most liquidity. I think generally that is correct - making FX (major FX anyway) the least predictive of things other than itself.
It is interesting to remind participants in FX that FX rates are bilateral.
Put another way, in a world where (allegedly) only the actions of CB’s matter, then one must look to BOTH CB’s (For eg. ECB and the FED for the EURUSD rate).
Looking at absolute levels and rate of change and the fact that there is nothing particularly frightening occurring in longer dated FX insurance... it is hard to see anything other than another false dawn for the foreign currencies.
Read 5 tweets
29 Sep
Were my Mentors right?

I was fortunate enough to have two superior mentors. One an absolute veteran responsible for much of what we call ‘Quant’ today and the second a ‘swashbuckling’ discretionary HF brand name.
The main advice from the ‘Quant’ - The market will reward trend following for a time and then reversionary strategies. The practitioner must accept that there exists considerable evidence that both are superior, so plan for this and push your edge.
This advice proved true and encouraged me to aim for BOTH high probability reversionary strategies and lower probability (but bigger!) momentum approaches.
Read 5 tweets
27 Sep
I am writing a fair bit on AI/ML with awareness that this is of value to non AI/ML players.

There is quantitative and there is quantitative. My firm is fully quant/process driven. A separate team that I hired is pure artificial intelligence and machine learning -
they were all "let go". I backed 5 world class practitioners and gave them free rein, three years and anything they needed.

We tried to analyse why they just couldn’t predict.
1. They couldn’t accept or prove to their satisfaction that the future distribution of returns is guaranteed to change.

2. They wanted the algorithms to find their strategies rather than applying experience and domain knowledge with first principles research.
Read 5 tweets
23 Sep
In my experience, a trader's risk taking matrix needs to include strategies that can extract profits when the market is rewarding reversionary outcomes and make money when the market is paying momentum traders. This is not easy to do technically and goes against much market
folklore, bias and 'hero worship’.

Look at it this way - if the market under consideration, for the holding period concerned historically, presently and in your forecast demonstrates reversionary behaviour, then why fight that?
Why deflect with sentences like "I only trade with the trend"? Equally and similarly, if the market under consideration, for the holding period concerned historically, presently and in your forecast demonstrates 'momentum' or trend behaviour
Read 5 tweets

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