Once you realised you are forecasting probability distribution conditional upon knowing something, then you can leave the technical analysis behind. You can then research conditional probability distribution on anything.
It is very advantageous to understand the level of uncertainty in the inferences you are making, and this is a fundamental mistake that human investors make.
Obviously, you can try and reduce that uncertainty by knowing more and more about the situation, like Warren Buffett. He reduces the uncertainty as much as he can by knowing as much as it is possible to know. That is a very different style to ours.
We have a much higher level of uncertainty than Warren Buffett when he makes an investment. But we have a much bigger and more dynamic portfolio. There are lots of ways to skin a cat, or lots of roads to Rome. My view is the success of our approach does not invalidate anybody else’s.
That is maybe not the only thing, but that is what I was: sufficiently desperate and needing to prove a point. Having these various motivations is what it takes to make you start a company–it does not just happen over a year and a half.
Source: Lawrence Gosling, Winton Capital’s Harding: How we use mathematics to bring order to financial markets. Investment Week, February 24, 2016. See http://www.investmentweek.co.uk/investment-week/interview/2447802/winton-capitals-harding-how-we-use-mathematics-to-bring-order-to-financial-markets.
Today’s podcast guest is Chris Clarke, ex-Goldman Sachs executive director and founder of Lawrence Clarke Investment Management. Clarke has been developing trading systems for decades.
The conversation today gets into the psychology of systems trading. Trend following is inherently simple to understand, and does not require above-average intelligence once the system is in place. Yet so many people, including most fund managers, tend to downplay trend following and keep seeking the “holy grail” – a magical system that will supposedly make them money without any downside. An interesting metaphor for this that Chris offers is that of weight loss. Although the theory of it is simple (diet and exercise), most people keep seeking the magic bullet that will make them achieve results without following the system. Much the same with trading.
Another topic that Michael Covel and Chris Clarke talk about is understanding the difference between risk and drawdowns. Drawdowns are normal, and will be there for as long as trend following as a strategy exists, and the markets keep trending. Ultimately, trend following is about human nature, and that’s not about to change.
In this episode of Trend Following Radio:
Trusting the system once you choose it
Being prepared to trade no matter which way the markets go
The importance of edge, and why gamblers lose
Looking at the math behind trading strategies
Understanding “market truths”
Drawdowns vs. risks
“The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.” – William Eckhardt