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The Argument For Simple Systems

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定量的なトレーダーとして, we are naturally inclined to make our trading systems more complicated than they need to be. Tinkering with adding different components attempting to find slight improvements is just what we do.

While that passionate pursuit of improvement has likely paid dividends in other aspects of our lives, it can sabotage our trading systems. We are generally better off to trade simpler systems with great discipline. もちろんです, that is easier said than done.

simple systems

There is no need to invent a better mousetrap, the simple systems we already have can work just fine with the right discipline.

There was a post published at Systematic Relative Strength that addressed the benefits of focusing on a simple relative strength system. While the relative strength part could be switched out for any other simple indicator, the principle behind the post is important.

The post starts by addressing the idea that no matter what simple strategy you choose, you have to actually use it:

One of the ongoing difficulties for investors is finding some kind of simple method for investing. Relative strength is just such a simple method. Even simple methods, しかし, have to be applied!

The post continues to argue the importance of simple systems rather than complicated ones:

If you can’t follow a method because it is too complex and if you bail in panic during the first downturn, you’re not going to succeed with 任意 method.

So we want to avoid complex systems because they will be more difficult to follow during downturns. That is a good point, but their next point is even better:

Simple systems are generally more robust than complex systems, and relative strength is about as simple as you can get. Relative strength is not an optimized system—like most simple systems, it will make plenty of mistakes but its simplicity makes it robust.

皮肉なことに, we want to find a system that makes mistakes. That way we know it has the ability to overcome them. That type of robustness is what gives us confidence that the system will be able to handle a ブラック スワン event.

Human nature, I think, makes it difficult to follow any system, whether simple or complex, so discipline is also required. Investors will improve their chances for success with a simple, robust methodology and the discipline to stick with it.

It seems like so many quantitative traders are forcing themselves to try to invent a better mouse trap. Why bother when the ones that we already have can get the job done?

In order to develop a profitable trading strategy, we need to have the discipline to stick to our system when the going gets tough. That can be done easier with a simpler system.

Could An Overnight Edge Enhance Your System?

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Markets are capable of changing dramatically while we are asleep. This can be seen in all types of markets for many different reasons.

Many traders avoid ever carrying a position overnight. Others ignore this concept because they believe that the impact is minimal over the long-term. Some traders simply avoid taking positions ahead of key news announcements, which is usually what trigger big overnight moves.

overnight edge

Sometimes markets make significant moves while they are closed for the night. Could we develop a system to capitalize on these overnight edges?

Jeff from Alpha Interface took a different approach to this idea when he wrote a recent post summarizing some research he found concerning large overnight price moves in US stocks. Based on the research Jeff wrote about, there may be an overnight edge in trading these moves.

The research Jeff summarized was a paper by Berkman, Koch, Tuttle, and Zhang. They examined 3,000 US stocks from 1996 を通じて 2008 looking for strong positive overnight moves. Here is what they found according to Jeff:

They found a strong tendency for positive returns during the overnight period followed by reversals during the trading day.

This behavior was driven initially by an opening price that was high relative to intraday prices.

It was concentrated among stocks that had recently attracted the attention of retail investors (typically due to a news announcement), it was more pronounced for stocks that were difficult to value and costly to arbitrage, and it was greater during periods of high overall retail investor sentiment.

So basically, when stocks make large positive moves overnight, they tend to go a bit too far. Jeff’s piece continues my suggesting how traders could take advantage of this:

Their tests were predictive and thus indicated that postponing purchases of these stocks from the open until later in the day can avoid these hidden costs.

同様に, selling these stocks at the open, rather than later in the day, can lead to major improvements in performance.

明らかに, this idea would need a lot more development before it could ever be a legitimate strategy. しかし, it is a very interesting concept.

It would be interesting to research how many “significant” overnight moves actually happen over the course of a year. This would probably vary a great deal based on the stock universe and your definition of “significant.” From there, you would want to determine the percentage of those trades that would have been profitable and calculate the returns on both the winners and losers.

While this system would require a lot of effort to develop, it could be the type of short term strategy that keeps your capital out of the market most of the time. That would give it the added benefit of protection from ブラック スワン events and some slight interest income from the risk-free asset you kept the capital in when there were no trades to be made.

取引ブロークン アローを処理するための最善の戦略をテスト

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任意のトレーダーの最も重要な関心事の一つがリスク管理を通じて資金を保護します。. リスク管理に対する最大の脅威の 1 つは突然クラッシュし、一晩彼らの価値の大部分を失うの位置.

夜間取引を保持して誰が最終的にこの不快感を覚えるような状況が発生する可能性. 何度も, これらの劇的な突然の損失は完全に私たちを取る驚きで. 感情的な決断をするように誘惑されないようにこの可能性に対処するための計画を持っていることが重要です。.

broken arrow

壊れた矢は珍しい, それらに対処するために、計画する必要があります。.

セザール アルバレスを呼び出すこれらの種類のグラフが価格の急激な低下によって壊れている増加の近似曲線が表示されますので、矢印を壊れた崩壊. 彼は最近、調査記事を書いた出口戦略になります。 壊れた矢印を処理する最善の方法. 場所の計画を持っている重要性を取り組むことによってその部分を始めた。:

ブロークン アローがあなたに起こる場合, あなたの出口戦略を知っていますか? その場合教えてことができます一晩取引を保持, ブロークン アローは最終的に発生します。.

貿易がブロークン アローに行くとき, EXPE のよう, 最初の事は私の計画で行く. 私はそれを発明する計画ではなく起こる, 私は貿易を入力される前に作成したプラン.

この特定のケースで, 私の計画は次までを単に保持するには 5 日の回転期間 (回転システムでこれを取引されました。).

戦略が壊れた矢印をテストするために首都を回復する最高の仕事をします。, アルバレスが壊れた矢印トレード数を識別するために必要な. 彼はから市場データのみを使用することを選んだ 2009 現在結果が現在の強気市場状況を表すよう. 十分な壊れた矢印を見つけることも困難な作業を証明しました。:

最初私はどのように多くの S を参照してくださいに見えた&P 500 株式市場の閉鎖 1 日 25% 以上. しかし、唯一 8 でした. 少なくとも見てみたい 100 取引が、少なくともを好む 200.

次にダウンをみました 20% 以上、これだけを与えたか 34 取引. 損をしようとしています。 15% または詳細を与えた 121 取引. ピンチで十分な私がもっと欲しかったが、. だから私は株式の大きな宇宙を見てみましょう方法を考案します。.

彼の宇宙を上部に拡大し、 1000 ドル ボリューム株, 取引の数を増やすことができた 318. これは彼の次の 3 つの出口戦略をテストする宇宙を与えた:

  1. オープンの次の日を終了
  2. 開く次の終了、rsi は(2) 上で閉まる 70
  3. 終了 5 日後に開く

私のために驚くほど, 発生日の近くで壊れた矢印を終了するよりも良い結果を返される 3 つのメソッドのそれぞれ. 翌日は生産終了との平均利益 0.77%. 他の 2 つの出口戦略はさらに良い:

上部を見てください。 1000 株式, 終了時の結果 RSI(2) > 70 またはほぼ同じ結果を与える終了 5 日後. しかし、もっと重要なこと, 次の日のオープンを終了するよりも良い結果をほぼ 2 倍.

困難な時期に基づくアルバレスがテストする十分な壊れた矢印を識別します。, これは定期的に自分自身を見つけるだろう状況の型ではありません。. しかし, 万一このような状況に対処するための計画を持つことが重要です。. 十分な長さを売買した場合, オッズは、あなたは最終的に、壊れた矢印に直面するだろう.

Black Swan Protection – Guarding Against Catastrophic Losses

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The most critical component of any system has absolutely nothing to do with entry or exit signals. It isn’t trailing stops, 資産配分, or position sizing either. All of those more technical and better documented topics mean nothing without a plan to avoid the next Black Swan.

The single most important aspect of any trading system is how well equipped it is to protect your capital against a catastrophic loss. Does your system have a plan to handle such an event?

Guarding Against the Black Swan

Trend following expert Michael Covel has spent the entire year traveling around eastern Asia giving talks in an effort to promote systematic trend following. In a number of his recent podcasts he has discussed one aspect of his talk that really strikes a chord with me personally. He explains that he generally gives these talks to conservative, long only fund managers who aren’t very receptive to his systematic approach.

The audiences are surprised when he suggests that there is a Black Swan circling over our heads. He explains that we have no clue when or where it will land, but we know it will eventually land somewhere. What are we doing to protect ourselves from it? What safeguards have we put in place? 興味深いことに, the audience members have not put much thought into this possibility.

We know from reading the work of Nassim Taleb that Black Swans occur far more frequently than statistics suggest. Our human nature makes us prone to underestimating both their frequency and severity.

Black swans affect trading systems

The Problem With “Conservative” Investing

My mother and her husband recently sold a rental property and netted about $60,000 on the transaction. They took that money and did what they have always been told they are supposed to do with it. They invested it in index based mutual funds. They have no clue about the risk of ruin that they are exposing themselves to because their “investment guy” told them this was “conservative.”

The problem with my mother’s “conservative” investment is that she has no exit strategy to preserve her capital. She simply plunked down all the money that she had at close to the all-time highs of the general market. 今のところ, her only plan is to hope for the best. If a Black Swan lands in Syria next week, she’ll simply chalk it up to “bad luck” and hope for the market to rebound.

It’s possible that she has made this investment at the beginning of what will become the next great bull market. It is also possible that her index funds will be worth half of their current value by the end of the year. Either way, she has no plan in place to respond to either scenario.

Analyzing How Systems Protect Themselves

If you are reading a website about systematic trading, you obviously have more sense than my poor mother. This means you probably aren’t invested in long term, buy and hold index funds, but have you given enough thought to how your approach will handle a Black Swan scenario? How would it have fared in 1929, 1987, 2001 または 2008?

In addition to profiling a number of different trading systems on this site, I have also been paper trading a few very simple systems on my own blog. One of the most interesting aspects of this experiment has been the ability to see how different strategies react to uncertain market conditions in order to protect capital. My mother’s approach has no such protection.

Some systems, like a lot of the mean reversion systems I have profiled, don’t have any set downside protection. They could theoretically hold a long position all the way down to zero, or hold a short position to infinity. While these types of catastrophic losses have a very low probability of actually happening, Taleb suggests that they are actually more likely than we realize.

Systems like the 10/100 Long SPY Long Only, 、 89/13 Breakout Strategy, と、 50 Unit EMA Strategy are all built to exit positions at certain points. While this may seem like an obvious point, it is critically important.

Another black swan is going to occur. We don’t know if it will be because of Syria, ギリシャ, or something totally different that hasn’t made the news yet. We don’t know if it will happen next month, or three years from now. We just know that it is going to happen. We need to make sure that our systems are prepared to handle it.

Antifragile Trading – Enhanced By Volatility

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In Antifragile, author Nassim Nicholas Taleb presents the argument that the opposite of fragile is not simply something that is unaffected by stress or pressure. He argues that there is a quality called antifragile where something actually improves as a result of that stress or pressure. Taleb categorizes things on a scale from fragile to antifragile, with a mid-point he calls robust.

When this idea is applied to trading, the first comparison that jumps out at us is between buy and hold investors and systematic trend following traders. Systematic trend following traders excel under extremely volatile situations, are virtually ignored by intellectuals in their field and are capable of handling deviations because they are not predictive in nature.

An Illustration of The Antifragile Concept

Taleb illustrates his concepts of fragile, robust, and antifragile through Greek and Roman mythology.

Fragile is represented by the story of Damocles, who was invited to a dinner at which there was a sword hanging over his head that was held up by a horse’s hair. Damocles is considered fragile because at any second the hair could snap dropping the sword onto him.

The concept of robust is represented by the Phoenix, which is a bird that is able to be reborn from its own ashes. No matter how many times you attempt to destroy the Phoenix, it continues to return to its original state, unharmed.

Antifragile is represented by the Greek Hydra, which had multiple heads. Every time one of its heads was chopped off, two more would grow back. Any attempt to hard this creature actually made it grow stronger. This is the core concept of antifragile.

An Application To Trading

One of the characteristics that can help measure the fragility of something is how it responds to volatility. This allows us to easily apply this concept to trading, because volatility is actually measured in most markets.

VIX Monthly shows antifragile periods of strength

A monthly VIX chart dating back to 1985

If we look at a long term chart of the VIX, we can see four distinct areas of extreme volatility: The Market Crash in 1987, The Asian Currency Crisis in 1997-98, The Dot-Com Bubble & Crash from 1998-2002, and the Financial Collapse in 2008. These highly volatile periods were high stress situations that would have made antifragile trading strategies better while making fragile strategies worse.

It is no coincidence that it was during these exact periods that systematic trend following traders posted some of their best years, and at the same time, buy and hold investors lost fortunes.

Systematic trend following strategies are not only built to handle these kinds of high stress, high volatility situations. They become stronger from them simply because they provide traders with a way to change direction. This ability to go with the flow during even the most chaotic times is a stark contrast to the rigidity of a buy and hold strategy where the investor has no choice but to sit and watch their portfolio crumble.

Overcompensation & Overreaction

“Intellectuals tend to focus on negative responses from randomness (fragility) rather than the positive ones (antifragility).” – タレビ

再びここに, we can see a clear application of this with respect to trading during high volatility periods. In each of our four high volatility trading periods from the past 25 年, most of the intellectuals and so-called market experts were focused on the negative responses, which were the buy and hold investors who were losing their fortunes left and right.

During each of these periods, there was very little focus on traders who were benefiting from the increased volatility. The antifragile traders seemed to go unnoticed, and we know now that systematic trend following traders where the ones who were benefiting from these volatile markets.

Layers & Deviation

Taleb also discusses the complexities that can arise when looking at fragility through different layers and dimensions. He illustrates that since what is good for the antifragile is bad for the fragile, then what is good for the fragile is likely bad for the antifragile.

We have already discussed the huge success that antifragile trend following strategies have seen during times that were terrible for fragile buy and hold strategies. When the inverse situations occurs where markets have little volatility, we have seen that systematic trend followers and buy and hold investors can produce rather similar results. The key difference though, is that the antifragile systematic trend followers have the ability to adjust when a black swan shows up.

“When you are fragile, you depend on things following the exact planned course, with as little deviation as possible – for deviations are more harmful than helpful.” – タレビ

He continues to explain that the fragile is very predictive and that being so predictive is exactly what causes fragility. This is the problem with buying and holding with the expectation that a position will go up over time. The entire strategy is predictive in nature, and that is exactly why it becomes fragile. It can’t handle a deviation from what it predicts.

それどころか, a systematic trend following approach can, by definition, handle any deviation from what is expected because it simply goes along with that deviation. This ability to adapt and change is magnified during periods of high volatility, which is when systematic trend following is at its best.