Catching the Tiger by the Tail

From The Little Book of Trading:

The reality? Markets are often in “tail” situations that can produce sizable profits–profits that, over time, will significantly outweigh losses that may occur when markets are not operating within tails. When I say tail, think back to that stats class you probably hated. The tail of the bell curve is what I mean: extreme events that are supposed to be very rare, but actually happen quite regularly in the markets.

Meaning, we all know the world is chaotic. We know surprises happen. We know that trying to explain the world with a perfectly symmetrical bell curve, a normal distribution, is not smart…so why not build a trading strategy to take advantage of that?

Simple. Wise.

5 thoughts on “Catching the Tiger by the Tail

  1. Dear Michael,
    With inspiration of your books, I have developed a system which includes all the principles of TF except the diversification. My system works best on Stock indexes. You would argue that it should work on everything. It works but I have tested only on all major indices of the world. With your thoughts on TF, I have kept system very simple and removed most unnecessary variables. Your books pinpoint the major challenges that are inside the mind of a Trend Follower which none other book does so clearly. If my TF story makes me rich (which i am sure) after 10-15-20 yrs, you will be my solo hero.. Shiv Ji Singh

  2. Mike, that is truly,truly, an awesome quote.

    The normal distribution is a model of a process as an orderly random process 🙂
    It was created by math geniuses to make ‘toy problems’ more tractable. Similar to perfect shapes of Euclid geometry that make measurement easier and possible.

    When you expect something to be orderly and it misbehaves, you are caught in a tail risk.

    Even latest talk about ‘tail risk’ by asset allocators and mutual funds, is in a way, a loser’s reaction.

    The quote above shows that instead of trying to ‘avoid tail risks’, actively seek ‘tail rewards’. This is why I mentioned that ‘asset allocation and portfolio theory’s adoption of ‘tail risk’ as a loser’s reaction.

    Mark, DGDye,
    The real difficulty may not be that trends are hard to spot early. It is that more than half of them will die early (which is ok, if you didnot bet your farm on each). The psychological ability to jump on each trigger when there is a 30/70 chance of a trend and taking whipsaw when it does not materialize and staying with them when they materialize – long long after the big payoff materializes, without getting scared greedy of the profits. That is the hard part that elevates trend following from a trading technique to a philosophy and a therapy for our petty selves.


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