The Yin Yang of Trend Following – Flipping Statistics on their Head in the Garden of Good and Evil

Readers of this Blog would be quite aware now of the underlying philosophy of the systematic divergent trader.

  • They would be aware of the concern placed by divergent traders in using statistical techniques as a measure of predictive certainty;
  • They would be aware of many possible future paths called risk and not attracted to the myth of a single optimised future path called guaranteed profitability;
  • They would be aware that divergent traders seek abnormality and non linearity in market conditions for their survival as opposed to predictable normal market conditions;
  • They would be aware that we fully engage in systematic application as this technique predates on the rational mind and we need a technique that prevents second guessing ourselves and falling into the same trap;
  • They would be aware that trading the ‘normal daily churn’ of the market is a divergent traders worst nightmare resulting in progressive building drawdowns while market conditions remain ‘convergent’ and predictable in nature;
  • They would be aware that alpha in this divergent space relies on those unpredictable rare moments when markets become less efficient and crowd behaviour becomes more coordinated in nature;
  • They would be aware that diversification is not simply used to capture non-correlated return streams but more importantly used as a measure to shop far and wide across the liquid universe of the financial markets for trending conditions that ‘scream out at you’ and are more likely to be enduring events as opposed to random ephemeral chart patterns. As a result, you are less likely to ‘pull the trigger finger’ on everything that moves and hence restrict your trading activities to the meat of the larger trending condition;
  • They would be aware that we don’t pick tops and bottoms but rather focus our attention on the ‘middle meat’ of trends;
  • They would be aware that all our efforts are directed towards risk management where profitable outcomes are just a symptom of the process;
  • They would be aware of the ups and downs of a civilisation and have a two way approach of either long or short as they understand that while history may not repeat, it certainly does rhyme;
  • They would be aware that we focus on the Pareto principle and the outlier as a way to survive in this competitive landscape recognising that it is the anomaly where the long term success in wealth building lies, not the demand for immediate reward of regular and predictable cashflow; and
  • They would be aware that our philosophy is deeply couched in the principles of ‘cutting losses short and letting profits run’.

Now despite this awareness of the philosophies and practices that shape the systematic trend following mindset, it is tempting to conclude that we throw away all statistics that are representative of more ‘normal market conditions’ and only use exotic mathematics of chaos theory that are more appropriate for adaptive non-linear market conditions.

Well the problem is that no one understands how to apply these peculiar and complex adaptive models and we shy away from any purported mathematical  process that seeks to ‘enshrine’ the future in certainty.

We don’t however throw standard statistics out with the bath water. ‘Au contraire’ my friends. Standard statistical treatment defines a population of market participants that like to play in the safe fictional world of certainty and immediacy…….and we like to eat them…..for they are tasty.

Rather we use standard  statistical treatment to define what are regarded as ‘normal’ market conditions or standard Gaussian behaviour and use them to draw a line in the probability sand of participants where we define a safe predictable world as lying within and a hostile uncertain scary world as lying without. The majority of participants lie within but the real ugly weirdos lie outside that line in the sand.

We flip the statistics on their head using the Yin Yang of it all and simply use it to define that region where traders like to think they have a grip on a complex system and that region where ‘most traders’ fear to tread.

That region we inhabit is where the predictive models break down and any supposed grip of the notion of ‘certainty’ is lost. In that hostile environment the ‘certain trader’ is stripped of their life support systems where they become unstable, emotional and gripped in the primal nature of fear or greed. They just can’t think straight and while ‘predictably’ stunned in the headlights or running into brick walls, we simply cackle ‘You are on our turf now stranger, looks like we are going to be fed today folks’.

You have got to be real ugly and sinister to survive in this hostile world of uncertainty. No beautiful and elegant designs for pure speed and precision….but rather thick impenetrable skins, warts and tentacles and pointy bits…..and you only come out to eat at night.

But hey…..we have feelings too. Do you know what it feels like when all about you are feasting on certainty. I mean really know? We just sit on the sidelines with maybe a brother or two being lost to the ‘predictable cause’ here and there when it all get’s too much. Our brethren are ripped apart by you guys but fortunately the real stalwarts, the arcane magicians, the orgres and the orcs keep most of us on the one path.

I know, you white knights want us all gone and vanquished but that ain’t gonna happen anytime soon. Provided that this world of uncertainty remains hostile to you predictable folk we will always be out there just waiting……Wherever you go, whatever you do, I will be right here, waiting for you!

Here is a nice big trend of opportunity that lies in our boardroom in Mordor. Trends are dead……*evil laugh*

Global Warming Changes in Annual Average Temperature Distribution

Not of our evil doing at all. Do we capitalise on it…..or would that be wrong? “Sauron…..what say you?”

“The humans mention charts of sun spot activity my lord and others speak of human induced warming?” Should we be concerned?”

“Let them quibble about the cause of it all Wormtongue, Smaug reports to me that the last time he checked, rising global temperatures were our best indicator that global temperatures were rising. That makes intuitive sense to me. Release the ‘worg riders’ to cut down those fleeing from displacement, go short the large insurers of reef tourism small business and look for opportunities in Tasmania to grow our grapes and create our house wines. “Summer is coming my friends”. 

“Saruman, report on the opportunities of Brexit.”

“Yes my lord, it is all coming to fruition. The trend is alive and well in that one. The battle for incoherent minds wages on. We don’t need to intercede at all. My army is just lying in wait on the perimeter in the forests at Helms Deep “

“Good. You have followed my instructions precisely. Now just check what Bobby Axelrod is doing? We need to see how the human predator is positioned for Smaug’s analysis.”

“I believe my lord that he is developing a fat tailed event that they won’t see coming. In all their confusion about the rightness of “do we stay or do we go”. Helms Deep only has two toilets, and he is supplying them with baked beans as we speak.” 

“Good, make sure your army stands firm and waits in the bushes then” 

You see we don’t have to invest in defence technologies and then start a war. We are a bit more subtle than that ‘golden oldy’. We just let those limited humans create chaos for themselves and then we just open our eyes.

We are not evil as you may think. We just observe it all and exploit opportunity. Just perhaps a little more detached than you would like…..but we are not the only ones in Mordor. There are others….in fact a whole host of them. Here have a martini as we chat and just knock ourselves the **ck out.

You know what certainty is don’t you in this mythical world of speculation. It is a fugazi and from this fugazi arise exploitable enduring patterns of human behaviour……of rinse and repeat. Revolutions upon revolutions. It is a rhythmic beat we can’t escape….here let’s sing the song of the rhythmic beat together.


Now there is an unusual creature called a hobbit which we need to truly fear for they are truly coherent. They see these things as we do but believe in virtue, goodness and the simple things in life such as freshly tilled soil and a bountiful planet. You know that dreaded word to us of ‘sustainability’. Some call them ‘tree huggers’ and that is exactly how we like it. We cannot afford to let their little secret out can we?

Sleep well and prosper. Nightie night.

Rich B

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