The way we look at systems development is to recognise that “No single system can be profitable across all market conditions”. This therefore forces us to consider suites of uncorrelated systems that together can navigate a broad array of different market conditions.
A video explaining how to use the Bollinger Mean Reversion Template using MS Excel.
The key to success in the divergent space is your ability to endure disappointment and continuously manage the downside risk. For most long term successful divergent strategies approximately 90% of trades or so are taken simply to keep the head above water…but the anomaly (say 10% of trades) were what led to the overall strong performance metrics of this solution.
Accepting that the market is efficient most of the time does two things to your trading psychology. It forces you away from even caring about a single trade to one of simply caring about the next few thousand trades and ensures for your long term survival that you must seriously reduce your return expectations, leverage appetite and focus on risk management.
In any complex system we inevitably come across the predominance of some patterns or relationships over others. For example we talk a lot in trading circles about the ‘fractal’ nature of markets or the dominance of certain features such as the Golden ratio or Fibonacci sequence. Now is this just BS for the tea leaf readers or is there something deeper in the significance in certain features of the data?
Part 3 which is the final installment of this series focuses on fine tuning the portfolio and adding realism to the backtest results. Before we can pluck the courage up to launch into our live trading following our exciting back-test results, now comes the time to remove any bullish euphoria and focus on the reality of live trading. We do this to dampen our expectations and ensure our risk weightings are correctly applied for live conditions. This is where the brutal reality of the frictional costs of trading need to take center stage….as we inevitably incur additional costs to that anticipated from our back-tests attributed to the realities of live trading.