That’s actually fine for me, but it isn’t for many other people. The systems one ultimate chooses have to suit one’s personality. If one cannot handle extended periods of working hard without making money (I can) one has to retool one’s trading systems to avoid such situations.
My opinion is that the best edges are robust. Robust edges tend not to disappear, but don’t post objectively high results either (in terms of SQN, Sharpe or expectancy). I’m investing in a fund that generates the returns (after fees) shown below, by using a very simple and standard approach to trend following, not much different from very similar methods employed by numerous other firms.
The fund is clearly an amazing investment, but its returns are lumpy; e.g. it generated a 108% return in 2008, but had a few negative years as well. Its Sharpe ratio is only around 0.7, not exactly institutional grade for most people. But its edge is robust, demonstrably provable, the system is simple and I understand it.
Lumpy but Robust
[ed note: this article has originally appeared at the Evil Speculator and was written by trader and ES contributor Scott. We provide a link to Scott’s past articles below this post for readers who want to get more familiar with his ideas and/or any unusual terminology used in this article]
One continual theme in my trading is that every time I think I have it figured out, I get punched in the face by an unexpected problem. The tendency is to go more complicated, but often the solution is a degree of acceptance with respect to the nature of the game. Sometimes my edges work, sometimes they don’t. Sometimes they stop working for long periods of six months or more.
Financial markets – multi-layered like onions
That’s actually fine for me, but it isn’t for many other people. The systems one ultimate chooses have to suit one’s personality. If one cannot handle extended periods of working hard without making money (I can) one has to retool one’s trading systems to avoid such situations.
My opinion is that the best edges are robust. Robust edges tend not to disappear, but don’t post objectively high results either (in terms of SQN, Sharpe or expectancy). I’m investing in a fund that generates the returns (after fees) shown below, by using a very simple and standard approach to trend following, not much different from very similar methods employed by numerous other firms.
The fund is clearly an amazing investment, but its returns are lumpy; e.g. it generated a 108% return in 2008, but had a few negative years as well. Its Sharpe ratio is only around 0.7, not exactly institutional grade for most people. But its edge is robust, demonstrably provable, the system is simple and I understand it.
Mulvaney Capital – a fund with a “lumpy” history of returns, but one that can be highly rewarding in certain market environments, particularly in sharp downturns – click to enlarge.
It is almost inconceivable that 20 years from now (the time frame I intend to keep this investment) I will be looking at an empty account saying “I wonder why trend following stopped working”. If the dreams of the bears come true, the odds are very strong that this fund will post another triple digit year. This is the gold standard of a robust edge for me.
Looking for an Edge
My opinion is that simplicity is sophistication, and complexity is laziness. The first thing one needs to figure out before going any further is: Does a system have an edge? Use a scatter plot to figure that out. If you don’t want to do that, pick the classic edges used by other professionals and you won’t go too far wrong.
At Evil Speculator, user Francis (Mulv) has gone out of his way to provide some excellent statistics. What he discovered is a classic property of mean reversion systems, which segues into a classic mistake often made in back-testing. That problem is selection bias; …read more
Source:: Acting Man
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