Every Outlier Begins Somewhere
The Foundations Series: Ten Essays on What Systematic Trend Following Rests On
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SERIES OVERVIEW
There is a moment in every serious trader’s education when the accumulation of information stops and understanding begins.
The two feel different. Information fills a room. Understanding changes how you move through it.
The Outpost has been publishing for years. The archive runs past a hundred and fifty articles on complexity science, fractal markets, systematic design, risk geometry, and the philosophy of operating under genuine uncertainty. The depth is deliberate. These are not simple ideas, and treating them simply does them a disservice.
But depth creates a problem for the new reader. Where do you start? The site was never built as a linear course. It was built as an ongoing conversation, one idea leading to the next, each piece assuming some familiarity with what came before.
The Foundations Series is the answer to that. Ten standalone essays on the concepts systematic trend following is built on. Not the tactics. Not the indicators. Not the entry logic or the exit signals. The structural ideas that sit beneath all of it.
“Understanding does not make the programme easier to follow. It makes the difficulty comprehensible.”
This post is the guided tour. It is not the whole argument. The essays do that. What it will show you is the shape of the series and where each step leads.
FIRST, THE FRAME
Before the ten, one framing is necessary, because it shapes everything that follows.
The approach this site is built on is called Outlier Hunting. The name is descriptive, not decorative. Market returns are not spread evenly. Most trades produce small results and a small number produce very large ones. In our historical research, a small minority of trades produced most of the total profit. Take them out of the record and the compounding falls apart. Leave them in and they carry everything else.
So the programme has one objective. Stay alive long enough, and stay positioned broadly enough across enough markets, that when the outliers arrive you are already holding them.
That objective changes what the familiar words mean. Diversification means something different to an Outlier Hunter than to a conventional portfolio manager. So does drawdown. So does edge. Without the frame, the ten Foundations are useful ideas. Within it, they hold each other up.
THE TWELVE-PART JOURNEY
Each piece stands on its own, but read in order they construct a single framework. The ten Foundations fall into four sections: architecture, edge, process, and operation.
Intro Every Outlier Begins Somewhere. Why the series exists, what an Outlier Hunter is, and how the ten essays are ordered.
1 What a System Actually Is. A system covers entry, position size, and exit, in rules complete enough that two people reading the same data would act the same way. Anything less leaves a judgment call hidden in the process, and it gets made at the worst possible moment.
2 Why Position Sizing Is the Most Important Decision You Make. Losses and recoveries are not symmetrical, because each loss shrinks the base the recovery is earned on. Position size is calculated from the account balance after completed trades rather than from a figure that moves with open positions, and the Cut Back Rule reduces exposure when that balance falls.
3 What Diversification Actually Does (and What It Cannot Do). Adding markets does reduce the weight of any one position, but it increases the number of places the next large trend can come from, which matters more when returns come from rare events. Covers breadth across markets, time frames, systems, and both directions. In our testing, long trends suited lookbacks of two to three hundred days while short trends needed ten to thirty, an empirical result from this programme rather than a universal rule.
4 Expectancy, Edge, and Why Most Traders Think About This Wrong. The expectancy formula gives the average result per trade. It does not show the path taken to earn it: the drawdowns met along the way, whether exposure had to be cut, or whether the trader stayed solvent and kept going. Also why a win rate below fifty percent is designed rather than broken, and why the apparent decay of trend following separates into four different causes.
5 The Role of Noise: Why Quiet Markets Are Dangerous. A new trend is indistinguishable from ordinary movement at the moment it starts, so waiting until it looks firmly established gives up more of the early move. And while large moves cluster with large moves, those statistics say nothing about direction. What a long calm period can do is encourage leverage, crowding, and less caution.
6 Why Systematic Beats Discretionary: The Evidence. Markets create moments when the person running a tested process feels compelled to interfere. Taking profits early removes the upside the programme depends on. Exiting losers early can turn ordinary movement into additional exits and re-entries, increasing whipsaw and transaction costs. Running an algorithm is not the same thing as not interfering with it.
7 What a Drawdown Actually Means. One word covers two events: a winning position pulling back toward its stop, which the trailing stop already governs, and the closed account being eroded by completed losses, which is what triggers the Cut Back Rule. A drawdown alone does not prove the edge has gone. Depth, duration, clustering, execution quality, and the size of winners are worth reading together, against thresholds set before the drawdown began.
8 The Difference Between Backtesting and Reality. A backtest shows whether rules worked across a long period, the shape of the losses, and whether the results survive changes to the parameters. The future may share broad characteristics with the past, but its regimes, sequences, and extremes will differ in ways the backtest cannot anticipate. Covers why shuffling trade order can make simulated drawdowns look milder than the historical record justifies, and why reusing validation data after changing the system stops it being out of sample.
9 How to Read an Equity Curve. Total equity moves every day because it includes open positions. The account balance after completed trades moves only when a trade closes, in many small downward steps and occasional larger upward ones. The second is the figure position sizes are calculated from, and a change in its character is a signal to check execution rather than redesign the system.
10 The Psychology of Following a Process You Trust. Understanding the statistics does not make the experience tolerable. Small losses arrive regularly while large gains arrive rarely and without warning, so most of the time the programme feels like it is failing. The preparation has to be built while conditions are good, including a stopping rule decided in advance.
Synopsis The Argument, Complete. The ten reassembled into one argument, with the connections between them traced and the routes into the deeper archive marked.
WHAT THIS SERIES CLAIMS
A word on scope before the takeaways. This series is an entry point, not a simplified version of the deeper content. The arguments in the Foundations are the full arguments at the conceptual level. What the longer articles add is depth of application and evidence.
The empirical figures the series draws on come from The Fractals of Finance research: forty-one years of daily data across sixty-eight global futures contracts. Two of them are worth stating carefully. A five-sigma day, counting moves in either direction, should under the bell curve appear about once every seven thousand years of trading. In the data they appear thousands of times more often, which makes the normal distribution the wrong model for estimating how often market extremes occur. And the persistence found in absolute returns describes the size of daily moves, not their direction: large moves tend to be followed by large moves, which is not the same as prices continuing the same way.
And the series makes no claim that understanding the framework makes the programme easier to run. It makes the difficulty comprehensible, which is a different thing, and the difference is the point.
FIVE THINGS TO TAKE AWAY
- Market returns are not normally distributed. A small number of large moves produce most of the long-run result, and you cannot know in advance which market will deliver them.
- A system is a complete set of rules covering entry, position size, and exit, written clearly enough that two people reading the same data would act the same way. Anything less leaves a judgment call for the worst possible moment.
- Calculate position size from the account balance after completed trades, excluding unrealised profit and loss. Spread the programme across markets, time frames, systems, and both directions, with shorter lookbacks on the short side.
- A drawdown on its own does not prove the edge has gone. Compare its depth, duration, loss clustering, winner size, and execution quality with thresholds defined before the drawdown began.
- The rules do not run themselves. Whether you keep following them through the difficult periods is what decides the result.
ABOUT DISPATCHES FROM THE OUTPOST Dispatches from the Outpost is the video series from ATS Trading Solutions in which I revisit our published research, explore particular ideas in greater depth and challenge the conventional wisdom that holds many traders back. Each Dispatch includes a full written summary, the central takeaways and links to the original research. → Subscribe on YouTube │ → Browse all Dispatches │ → atstradingsolutions.com |
Richard Brennan writes on systematic trading, complex adaptive markets, and the philosophical foundations of trend following at atstradingsolutions.com. His books include The Fractals of Finance, Complex Adaptive Markets, Carved by Impossibility and The Aussie Turtles Trend Following Guide.
Want to explore why structure exists at all?
Carved by Impossibility: What Remains When Everything Else Is Eliminated
The book explores the architecture of constraint, emergence, and reality itself, and what it means for how we understand markets, life, and the universe.
Available now on Amazon in paperback, hardcover, and Kindle.
Want the theoretical foundation for why trend following works?
The Fractals of Finance: Determinism, Adaptation and the Geometry of Markets
The book explores the full architecture of feedback, fat tails, and fractal structure in financial markets, and what it means for how we trade, invest, and understand risk.
Available now on Amazon in paperback, hardcover, and Kindle.
Want a practical field manual for trading trends and capturing outliers?
The Aussie Turtles Trend Following Guide: A Field Manual for Hunting Outliers adapts the timeless principles of the original Turtle traders into a systematic, rules-based approach for modern markets. Co-authored with Adam Havryliv.
Available now on Amazon in paperback, hardcover, and Kindle.