Embracing What’s Working Now


Long-time readers have watched my thoughts on certain subjects evolve over time. Blogging for as long as I have (egad…almost 5 years now), about such a difficult to wrangle subject, necessitates it.

Something I’ve come full circle on is whether my trading should focus more on concepts that have existed for a very long time (like trend-following or TAA), or whether it should focus on concepts that are unlikely to be here in a decade, but are here in a BIG way today (like short-term mean-reversion used to be, or volatility trading is today).

Once upon a time, before MarketSci was even a twinkle in my eye, I was focused on the latter – those anomalies that we enjoy here and now.

I was all about buying stocks on dips, starting every day with a cup of coffee and a couple hundred deeeeeep limit orders.

Eventually I moved on to other things, including short-term mean-reversion, which is what I was trading when I launched MarketSci back in 2006. Times were very good until 2009/10 when that anomaly began to dry up.

Through all of that I knew I was trading ideas that were making big money today, but would probably look very different in a decade. But that was okay. As long as I kept researching, there would always be the next anomaly to capitalize on.

A few years ago I began to question that perpetual state of research and put a big toe in the water on longer-term concepts like trend-following and tactical asset allocation.

Now, I’m not going to poo-poo those ideas again here (I’ve done enough of that already), but I will say that I’ve come full circle on this subject.

The last couple of years have seen me return to my roots: short-term trading what Mother Market is offering today.

Yes, the perpetual quest for the next big thing is a drag, but there’s a reason we do it: because it works (or at the very least, it’s worked very well for me). These concepts may be fleeting, but potential returns are juicier than anything any longer-term strategy could provide.

I forgot that last part for a little while there. The death of short-term mean-reversion soured my grapes, and I lost sight of the fact that we’ve been through this before.

Concepts work until they don’t. As long as we stay on the front end of quantitative research, we can ride those ideas until they’re consumed by the market. Then we can put our nerd hats back on and move on to the next big thing.

Happy Trading,

. . . . .

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22 Responses to “Embracing What’s Working Now”

  1. I think you hit the nail on the head. As a systematic trader, I don’t see the point in being married to a particular strategy. A trading strategy works until it doesn’t as you noted. There are statistical means of determining whether a strategy is working or should be taken offline and DIY investors should analyze their closed trades for this reason. How long a particular strategy is going to work is unknown and investors need to understand that plus have a means of determining what strategies are working now and are suited to their investment style.

  2. 2 bgpl

    hi Michael,
    enjoy your blog, as always.
    At the end of the day it seems to be returns can only come from either
    (a) discovering and using an anomaly or effect which has not been arbitraged out
    (b) using an effect which cannot be arbitraged out due to various reasons

    I think you are talking about (a) here. Fully agree with that since it is more fun, and potential rewards are more.
    But: Are there areas that (b) exist – for generational wealth management and not short term investing ?
    For example, it is hypothesized low volatility investing may be difficult to arbitrage out due to various reasons like agency problems, tracking error etc., which make it difficult for large players to saturate the anomaly, and small players cant move the needle as much since it is not a very short term play. Also, the more people invest in low-vol stocks, the more low-vol they become (unless they start falling or becoming more volatile – in which case they drop out of the low-volatility filter).
    Might one use such techniques as a ‘generational’ scheme ?


    • 3 MarketSci

      Hello bgpl – I like the way you’ve reworded this: anomalies which haven’t yet been traded out, versus ones which can’t be traded out. I will be plagiarizing that in the future =)

      I take no issue with your point re: the former being for the risk seeking portion of our portfolio and the latter being for “generational” wealth management. I’ve made a similar case in the past.

      And if I were going to stop researching today and just sit on a beach somewhere, these longer-term strategies are definitely where I would be parking my money.

      For me personally however, as long as I am still researching, I think there are more effective conservative plays.

      Great comment. michael

  3. There is value in rule based investing, you just have to get the rules right. I prefer to invest in SPY-like ETFs so my rules are only based on SPY. The ultimate goal is to buy low and sell high with minimal hassle and heart burn. It appears that you need more than one rule, a rule set when to buy to catch the bottom (or just close to it), a rule set that guides in deciding when to sell around the top and a rule set or two that are designed to save you when you screw up. It would be great if a 15-30 day crossover rule always made money but it won’t. Maybe you pair it up with a couple of other rules based on market observations and/or indicators and generate a series of if-then like statement to guide your investing. I don’t use the 15-30 cay crossover rule to invest with, but it is a general guide to my investing approach.

    • 5 MarketSci

      Rich – everything I do is rule-based (and only rule-based). This post is not about rule-based or not rule-based. It’s about rules that have worked for generations versus rules that are working today. Perfect example: RSI(2)

  4. “Concepts work until they don’t.” You might call that meta-trend following — and it is vulnerable to the same problems that face traditional trend-following: identifying trends and determining when they are no longer trending.

    • 7 MarketSci

      Hello Russ – I totally agree, but I think our results speak for themselves that’s it’s entirely possible (not every month or even every year, but in aggregate). michael

      • Your results indeed speak for themselves. My comment was a criticism. It’s really a question. How does one (how do you) find trends? How does one (how do you) decide when a trend has stopped working?

        The second question seems easier to answer: stop when you are losing money. But it’s not that easy. With price trends, one doesn’t quit when one loses. One sets stops (or something similar) that determines how much one is willing to lose before quitting the trend. The question then becomes how to set the stop.

  5. I meant that my comments wasn’t a criticism!

    • 10 MarketSci

      Hello Russ – I didn’t take it as criticism, I just gave a very lazy answer =)

      If I understand how your comment pertains to this subject correctly, the question is how to know when a concept (as opposed to a “trend” in the normal sense of the word) has stopped working? That’s a great question and one I haven’t always been good at identifying early enough.

      I think it’s actually much easier to say something new is working today then to know when something that was working has stopped. Big subject. Sounds like a future post topic? michael

  6. 11 MR Trader

    I must admit that I don’t understand why traders say that mean-reversion system stopped working. I trade one MR-System, over multiple markets (around 40 global ETFs), and the results are very good (>15% every year in the past 5 years, including 2012). I use a relatively short duration system (my indicators are 4-5 days), and average position is held about 3 days.

    Okay, so it’s not RSI2 but, let’s say something more similar to RSI4 (but not exactly). Is it such a big difference?

    • 12 MarketSci

      Hello MR Trader – because the effect isn’t nearly what it used to be. I agree that MR works in other time frames (and have shown that many times on this blog), but once upon a time it was a license to print BIG money. Now it’s a much more nuanced trade. michael

  7. 13 Garret

    Hi Michael,
    I have followed you for some time. This post reminds me of the Carnival Cruise ship in the Gulf. You are adrift in the sea of markets looking for a port to call home. A very dangerous place to be.

    • 14 MarketSci

      Garret – see my performance – real time results, actual, verifiable, killing it. Silly comment. michael

  8. 15 j livermore

    Hi Michael,
    I’m not completely convinced TAA / momentum is dead due to the efforts of Gary Antonacci (2012 NAIIM winner). His real-time GBMI index returned 12%, 21%, 19% and 25% the last 4 years and looks reverse engineer-able:



    • 16 MarketSci

      Hello J – I would suggest a re-read. TAA, trend-following, momentum, etc are not “dead”, but a big component of the diversification inherent in all these glorious TAA backtests is sick. Linking to yet another backtest that doesn’t account for the issues I’m referring to totally misses the point.

      Please don’t take that as snark. I appreciate the effort to inject quantitative data into the discussion.


      • 17 j livermore

        If you look carefully, the recent data are real-time, but I do agree that the bond bull market has been a huge tailwind for these strategies. My personal favourite is using market breadth to identify turning points but your volatility stuff looks great also for short term trading.


  9. 18 Laszlo

    Hallo Michael,
    You made me curious with the idea, thanks a lot. I would like to ask, why have You stopped following the strategy. Thanks Laszlo

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