If I’m honest with myself, I’m officially pissed off about missing this rally. I’ve been telling myself for weeks not to worry about missing out, that I’m executing my plan. And I have been, faithfully, but it turns out that maybe it has been the wrong plan for the current conditions.
Mean reversion systems have been my development focus, since they have been working really well for the better part of a decade. Knowing full-well that MR systems tend to under-perform in a strongly trending market, a system based on momentum has been very high on my systems-to-develop list. I erroneously figured that there was no real rush though as 2009 would see continued volatility and would likely be characterized by mostly rolling, sideways action. Rolling, sideways action and volatility is excellent for MR systems.
As we all know, the first four months of 2009 have been very strongly trending, with very few spikes or pullbacks. The first two months were characterized by a steadily downtrending market which offered some shorting opportunities (if you didn’t mind shorting into oversold conditions), but any long-biased trades were killed. From March to the present the market has been just the opposite: strongly uptrending, offering many long trades (if you don’t mind buying into overbought conditions). And of course, shorting since the March lows has been brutal.
Simply put, 2009 has been the year of Momentum. 20% straight down, and now 30% straight up. I have been sticking with my MR systems, and it has been the worst possible environment for these systems. My account is in a drawdown for the year. Not an awful drawdown, but negative for the year, nonetheless.
Regardless of the pain and account-envy I’ve endured over the last couple of months, I am going to continue to execute my plan, and that plan is to only trade when I understand the edge. In hopes of finding some balance before the year is lost to me, I am working to crank out a good momo system. By the time it is finished, I’m sure the market will be right back in reversion mode. That is just how things seem to go.
I am 25% short the SPY, as of Tuesday’s open. I have been desperate to pick up long exposure, and while I have a great system for picking up trending stocks, it was not designed for a market that does not pullback. I have no idea how much longer this trending will continue, but I know that it will certainly reverse as soon as I give up mean-reversion. Therefore, the beatings for me have to continue.
Wood,
Don’t kick yourself too hard. I have friends and family running hedge funds that were negative for March and April. Smart people don’t always make money….
…gunslingers do. (Because there’s always something or somebody to kill).
a few things for you.
1- give up on mean-reversion, for my sake.
2- no more comments on futures trading during night session.
3- stop crying and feeling sorry for yourself and hit this coming pullback. it may turn out to be a rather large one, i think.
4- crank out your momo system
your friend
chivas
ah the pitfalls of discipline. the market is always changing, more accurately, the market environment is. either stick to your discipline or learn to adapt to the market. the latter is more profitable and more difficult to learn. systems keep you disciplined and your resources meager. adaptation (a learned skill) keeps you fat and well armed. the lazy are not rewarded.
Alpha, there is a gunslinger system, in the works. I am working on developing my psyche for how aggressive and active it is…Alas, it is contrarian.
And I’m not very smart, just persistent…
Chivas,
1. Not sure what you mean. Not sure that it matters that I know what you mean.
2. Check, lol.
3. I am positioning for it. I’m looking for it to put me back positive on the year.
4. No doubt. Check plus.
Thanks Chivas.
in your post you said the market would reverse as soon as you gave up mean reversion. so i said, give it up for my sake. lol.
Wood,
In this crazy market one has to have multiple strategies that can be used out of the toolbox.
My approach has been to use contrarian (mean reversion) and trend following strategies, along with a little good old fashioned buy and hold, e.g. CBL, MAC, FOE, etc., during this rally.
Go with what works. What doesn’t, don’t throw out, just set it aside—-it might work later on.
You’ve been killing it Alpha.
Multiple strategies is the key. Still working feverishly to have a quiver of strategies where some will be working all the time. Its a time consuming process, but I will be rewarded down the road.
Chivas, lol…I get it…its late….need sleep…zzzzzzzzz
I’ve got a buddy who manages a fund of funds. He has multiple managers that deploy different strategies, e.g. momentum, contrarian/mean reversion, merger arbitrage, market neutral, long/short equity, distressed securities and high yield, and he allocates amongst the managers as he sees fit. He’s essentially an asset allocator and a macro manager. What he tries to do is achieve negative correlation among trading strategies. It’s the ideal job for a “big picture” trader/investor.
He’s been positive every year since 2002. Last year: + 51.88%, and annualizing at 26%+ per year.
That is the future of investing, imo.
Ah, but your solace is the discovery of new tweaks and edges. Like maybe cuervos’ huge gimme on using logarithmic values, or marketsci’s recent posts on system trading. Right now I am preferring to disregard the level RSI or whatever (say, a log-modified RSI) is at, and instead comparing two or more RSI periods’ relative position, maybe adding offset criteria of some amount between them. I think this keeps a MR system firing away and it starts hitting swings sooner after a strong run from the mean. But, it doesn’t make for high odds per entry, so there you go. Maybe the point of mean reversion, or trading in general is to keep swinging. Another marketsci thing – they make a market call and then add science. With nothing at all to base this on, I think in the end 50% of your won bucks will be on the discretionary side.
Shed – you are a great trader. Don’t kick yourself.
So you missed a rally? Big whoop. Do your thing, and, in time, it will come to you.
I’m rooting for you, friend.
MOOBS
Just remember that all this stuff is both art and science. Too many people try to make it more one to the exclusion of the other. There’s a balance needed there, that people have a hard time maintaining.
And that is what separates the haves from the have nots.
A good decade beats a good two months.
I don’t know what your target time frame is for your mean reversion trades, but it is possible to extend the time span so that mean reversion captures longer term V-shaped moves. They may look like strong trends to the momentum crowd, yet if you can get some of the Mar-May action to cancel out Nov-Mar, that would be a hell of a mean reversion play.
I can only applaud patience and discipline.
Cheers,
-Bill
Thanks for the support folks.
Bill L, glad to see you stop by here. I’ve been thinking about how to extend the time frame without incurring huge drawdowns. Right now most of my MR trades, when they work, average about 6 days.
If you have any thoughts about how to position for longer MR trades, I would love to hear them.