Sometimes, when we attempt to understand complex ideas, the thoughts become so tangled and intricate that we’re forced to pause, take a deep breath, and retrace our steps. It isn’t that we don’t know where we’re headed; rather, something in our thought process itself blocks our momentum, causing us to falter.

Let’s take an example from reading books on complex topics like advanced mathematics, physics, or financial markets. There are times when the text becomes overwhelming, and our biases might interfere with our understanding of the author’s explanations. It can be worthwhile to revisit the content and parse it again. Often, great ideas are simple at their core but require a reader’s focus and a coherent understanding of the entire process. Miss one step, and you might find yourself with a significant error in comprehension.

Understanding Complexity: Nonlinear Mechanics

In the world of complex systems and in particular complex adaptive systems, such as the financial markets, this iterative process of understanding is crucial. It’s not uncommon to miss a critical point in an author’s explanation, particularly when dealing with nonlinear mechanics. You might initially think, “Well, how did you get so far over there when you actually started here? That’s totally wrong!” Yet, later in life, revisiting the same thought puzzle may leave you stunned at your own naiveté, realizing, “How could I have missed that?”

Such is the nature of complex ideas, especially when it comes to trading and investing in financial markets.

The Trend Follower’s View of Financial Markets

A Trend Follower views these markets as adaptive and complex by nature. What does that mean? It means that in real markets, under time irreversible nonlinear mechanics, things can be both predictable and uncertain. While they may exhibit predictable tendencies for a time, over the long term they are inherently indeterministic. Indeterministic systems, counter to what we might think, can be assembled from collating deterministic systems together as an ensemble. There is something ‘more’ about the new system we have created than can be explained by the behaviour of its constituent parts. This gives rise to the adaptive nature of some complex systems. We are trading a deeply correlated system of evolving relationships between agents, from the humble individual trader to the largest institutions. Complexity emerges at all scales leading to the need to comprehend the system at all scales. One small oversight can lead to a massive margin of error in our assumptions. More importantly we need to understand that the small can effect the very big and the big can effect the very small under a nonlinear relationship. To understand the health of a human being for example means that we need to understand the state of the entire system from the small to the large. The blood, the chemistry and the large scale structures such as the organs. Each emergent structure in the body has an intricate set of relations with each other. Health is a holistic measure applied to the state of these relationships. Einstein’s gravitational field theory that explains so much about our classical world is just another massive nonlinear fractal system. The small governs the big and the big governs the small in a dynamically entwined relationship. An electron tells spacetime how to curve and spacetime tells the electron how to move.

This seemingly malevolent behaviour found in a financial market is a result of the markets’ deep-rooted fractal nature. Many might assume that all market participants are rational, but that’s far from reality. The participants themselves are fractal systems from their bodies to their brains. How can they be all the same?  Markets may appear simple on the surface, but that is an illusion. They can often verge on chaos, where small actions can cascade into significant events. A singular series of Nick Leeson mistakes can put the market into a frenzy.

We need to approach these markets like a child who is always asking, what’s the next step Dad? We shouldn’t assume that we can take statistical shortcuts of small sample assumptions to speed up our story to our son and get to the pub. The child understands the coherent thought train, but the adult frequently disrupts it with their heuristic shortcut (their bias which was a roadblock). It is essential to continue the fairly simple train of thought to its end and answer the child’s questions along the way, otherwise we are going to leave our child confused and turn them off complexity forever, just as the adult actually was.

Uncertainty and Simplicity: A Trend Follower’s Creed

A human seeks to understand this complexity by joining the dots in their hopefully coherent knowledge but they too are limited. Swayed by the limited bubble of their understanding. Where they insert blanks in their coherent narrative where these blanks are unresolved mysteries that may have causal implications for the entire system of relationships. It’s not that this missing piece is necessarily complicated. Rather this missing piece may be a simple link in a coherent narrative that leads to profound divergence in our understanding. This means that none of us are ever likely to fully comprehend the systems that we are embedded in, but we certainly can become closer in recognising where the risk events lie in our limited understanding.

A Trend Follower understands the principle of market complexity and remains uncertain in their long-term outlook. They don’t pre-empt trends or try to predict when they will end. They embrace the complexity and uncertainty, knowing that it’s not something they can hope to fully understand.

Many investors and traders might think the markets aren’t that hard to trade. They believe they can crack the puzzle with heuristic statistical equations. They tweak their models, run back-tests, and rely on statistics that can often be misleading if the wrong assumptions and tools are applied.

The Trend Follower’s Approach: Embracing Complexity

The Trend Follower says, “To hell with this complexity. While I’m aware of it and embrace it, I can never hope to understand it fully. I’m not going to predict future returns. Instead, I’ll assume that uncertainty persists in the financial markets at all times.”

They adopt an incredibly simple asymmetric system applied across all the financial markets to capture the existing uncertainty. They know they’re not sufficiently clever to fully understand the mechanics of these markets, but they can still do something about it.

In the end, the Trend Follower is born amidst the cauldron of complexity. They navigate through the intricacies, aware of their limitations, and relying on a simple system that acknowledges the ever-present uncertainty in the markets.

By stepping back and reflecting, by recognizing the complexity and embracing uncertainty, the Trend Follower creates a path through the maze of financial markets. They teach us that understanding doesn’t always mean mastering every detail, but rather finding a coherent and adaptable way to engage with the complexity. It’s a lesson that extends far beyond the world of finance, reaching into the very way we approach learning and comprehension in all aspects of life.

Trade well and Prosper

The ATS mob