Sunday, 31 January 2016

Breaking the trading routine

19:11 Posted by The Thalesians (@thalesians) No comments

Routine. The drudgery. The predictability. The sheer monotony. In all my years, I can't recall reading the words, "I dream of routine". No one enjoys the sense that everything they do is routine. However, a modicum of routine helps to give life at least some structure.

Those occasions when we break from our routine, are in a sense what makes it all manageable. A stroll through a new environment, the sight of a painting you've never seen, the sound of song being played on the radio for the first time: the freshness of novelty is intensified when it is a comparatively rare experience. If we are repeatedly surprised by the novel, far from enriching our viewpoint, it suddenly becomes commonplace and routine, a dull and underwhelming experience. Bertrand Russell describes this idea very well, in his book the Conquest of Happiness.

Markets are both routine and novel. At times price action seems boring, range bound and directionless. News seems to do little to move prices. Of course, these periods are never permanent, and are often preludes to a shift in sentiment. I remember, when I quit my job in 2013, FX markets seemed to be on inescapable path to lowering volatility, accompanied by declining lack of interest. The dollar rally started in earnest as Autumn came in 2014. Volatility spiked and currencies actually started to move.

Is a routine or a novel market better? It depends on our strategy! If we are a carry investor, lashings of volatility accompanied by risk sentiment that swings around like a yo-yo are unlikely to be a joy to behold. By constant a trend follower much prefers markets where volatility is picking up, which are often accompanied by the development of trends.

We can complain all we want that the market environment is unsuitable for our specific trading strategy. We unfortunately don't get to choose the market which faces us. It is like complaining that you feel cold whilst strolling through the park during a particularly brutal winter day, when you haven't bothered to wear a coat. Rather than saying the market is unsuitable for our strategy, maybe we should instead think about it the other way round: whatever trading style we are adopting isn't suitable for the current market.

If our time horizon is very long, and we are not massively leveraged, we may well be able to stick it out in an "unsuitable" market. If we have developed a systematic trading strategy we might find that historically that periods of under performance occurs at times, but as a whole, the strategy is still profitable over reasonable time periods. However, with high levels of leverage and very concentrated risk, we don't have this luxury, and need to to think about what we can do to alleviate the situation.

So which is better, the novel or the routine? Sometimes we can't choose between the two, and simply have to deal with it.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our group for more details here (Thalesians calendar below)

08 Feb - London - Saeed Amen/Delaney Granizo-Mackenzie - CTA/Pairs trading (joint Thalesians/Quantopian event)
16 Feb - New York - Thalesians/IAQF - Harry Mamaysky - Does Unusual News Forecast Market Stress?
29 Feb - London - Jessica James - FX option trading
21 Mar - London - Robin Hanson - Robin Hanson, Economics when robots rule the Earth
13 May - Budapest - Saeed Amen/Paul Bilokon - Thalesians workshop on algo trading at Global Derivatives


Post a Comment