Wall Street Journal has an article out called:
The article goes to explain how some of these quantitative models are failing traders and their hedge funds in these market conditions.
One model driven hedge fund lost 4% in October. Another model fund was down 6% for the year. Yet another model fund was down 14% for the year.
The article writes about the models:
Since May, the models have been confounded by the euro’s sharp up-and-down swings.
Robert Savage from the Ikos FX Fund said:
All the models, they just haven’t worked.
Some of the models worked earlier in the year, and now some of the same models are failing in the current market conditions. Now obviously I don’t know what their models are based on. And to be fair, there are probably some other model driven funds that are up for the year.
However, if there is a model driven trading strategy that previously worked, then all of a sudden stopped working, there has to be a reason why.
There are answers – rational answers.
Either the model driven strategy did not generate order flow to begin with. Or the model driven strategy previously generated order flow, but now doesn’t anymore in the current market condition.
Pretty simple stuff dont you think?
If your model driven strategy is spitting out buy and sell signals, and those signals are not followed up with aggressive order flow to move price in your direction, the strategy is going to fail.
You don’t need to get all complicated with the algorithms and quantitative strategies. You just need to predict the future order flow of the humans. Sure quantitative trading has grown over the years, but they are still a small impact on the market price most of the time.
The far greater market participants that you should follow and learn about are not the model driven traders. The market participants who you should follow are the news/sentiment/fundamental/macro traders. You follow their future order flow and you can make far more money than the model driven strategy traders.
All sorts of people, both beginner and even some very rich traders using model driven strategies because they believe in their magic. Or they like to absolve trading blame from themselves to the computer models.
Some quant funds are “tweaking” or overriding their computer models. Which begs the question, why not junk them entirely and just rely on raw human talent for perceiving the things that truly move the market?
Model driven strategies do not always move the market.
Order flow and liquidity always moves the market. It has to. For it is the foundation of every market.
I am not saying that order flow trading is the perfect system. It takes losses like other trading systems.
I would much rather take a loss on my order flow system, instead of placing a trade based on some model driven strategy spitting out a signal. Because I know my order flow system has a good chance to signal when order flow will come into the market. The model driven strategies are always failure in my mind. I stopped searching for forex robots, expert advisors, and magic quantitative trading system a long time ago.
I would much rather risk money in the market using an order flow based system. That I feel much more comfortable with.
After all, the model driven strategies can fail miserably at times. Mathematical models and complicated algorithms failed many times in history.
They failed with Long-Term Capital Management blew up.
They failed during the housing bubble, where all the big banks were relying on their mathematical models which told them that housing could never go down nationwide.
And they failed during many months this year.
All sorts of people using models as a crutch for bad trading decisions. They are using models as a substitute for common order flow sense.
George Soros in the book Soros on Soros was asked why he doesn’t employ scientific methods. His response:
Because we don’t believe in them. They’re generally constructed on the assumption of efficient market theory… I think that those methods work 99 percent of the time, but they break down 1 percent of the time. I am more concerned with that 1 percent. I see certain systemic risk that cannot be encapsulated in those assumptions that generally assume a continuous market.
Soros says that he can perceive systemic risks (and thus volatility and opportunity) which cannot be perceived by the mathematical models. Human beings can perceive numerous things that models just can’t compete with.
Even Lloyd Blankfein, the CEO of Goldman Sachs said that he spends “98 percent of my time thinking about the 2 percent probabilities.”
It’s always the 2% that kills you if your not careful. The mathematical models have a tough time picking up the 2 percent probabilities.
Therefore make money during the 98% of the time, while prepping for the 2% probabilities. Then when the 2% probabilities actually happen, you are prepared to go for the jugular and achieve outsized returns. That is one of the secrets.
Figure out those true market perceptions and achieve the radical pursuit of truth and watch yourself have a trading edge for life.
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