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> If you believe that everything reverts to the mean, then you're using the
> wrong math to trade. If you believe that the markets conform to a
> binomial/Gaussian distribution, you need a reality check. And if you are
> using 'Aberration' to trade, then you deserve everything it gives you. :-)
With regard to reversion to the mean, I'd suggest a hour or two with *Time
Diversification Revisited* Reichenstein and Dorsett, Baylor University and
Research Foundation of the Institute of Chartered Financial Analysts, 1995.
I'd also suggest that you look at the trend following funds that have
outperformed the S&P consistently over the past ten years and look at what
their universe is. 'Pretty good chance that you will find high
concentrations in short term interest rate futures, industrial metals and
currencies. And industrial metals and currencies react most strongly to
what? Short term interest rates. Reason? These are the only markets that
consistently avert from the mean.
With regard to normal distribution, its the break outside the distribution
that produces the greatest opportunities for the trader. In the past ten
years we have had four or five events that come to mind wherein markets
moved out four standard deviations or more (on a monthly basis) from the
mean and all four occurrences provided tremendous opportunity as they
reverted. Once in lumber, once or twice in coffee, once in wheat and once
in the nasdaq (closer to 6 SDs). So, if there have been only four or five
such occurrences in the past ten years, why do I need any sort of reality
check?
Aberration? See above.
> : All systems cease to work.
>
> Prove it.
All right, I give up. Somebody out there probably has a system of
statistically significant lifespan that has shown success. Of course that
would place them outside the normal distribution of system traders :-)
>
> : The system trader's primary job is finding the
> : next system. The system trader's greatest fear is that his system is in
> the
> : process of disintegration.
>
> Again, prove it. If you're gonna keep on making these generalizations, I'm
> gonna keep on asking for proof. :-)
One of last year's most effective system trader was likely Roy Niederhoffer.
He's made a business of following eleven or twelve systems and picking which
are likely to be working at any given moment. I think Mr. Niederhoffer
would concur that he and his firm's ability to pick the right systems at the
right time has contributed to their success.
I agree with you that the system that fails is fundamentally flawed but I am
of the opinion that declaring a system fundamentally sound is as difficult
as proving that global warming is something other than an aberration. The
majority of the systems in use today have not been around long enough to
impress beyond simple randomness. But then again, most of the traders
managing money today with discretion haven't been around long enough to get
past the issue of random success either :-)
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