26 Feb Deciphering Cliches, Making Money
Deciphering Cliches, Making Money
Feb. 26, 2020
As you probably already know, I do not like clichès.
They’re unimaginative and unhelpful.
But it’s when cliches cross over into jargon that I really get angry.
What’s the point of jargon anyway, other than trying to let the listener know that the speaker is smart and you are not.
Using esoteric jargon doesn’t make anyone better, it just makes everyone confused.
At best, it forces a low-confidence person to try to learn jargon so he can join the Smart Person Club. At worst, it prevents innocent people from making money.
For example, in the trading world, a big buzz word is “crisis alpha.”
As in, “The reason regular traders never outperform is that they don’t generate enough crisis alpha.”
So, what does crisis alpha mean? It means a strategy makes money (aka alpha) during times of crisis (aka crisis).
The thing is: this is an important concept. All traders need to be prepared for times when the markets move into crisis mode. Traders with no plan in 2008-2009 suffered tremendously. Some lost everything.
Back then, the concept of crisis alpha was critical.
So, why disguise it with silly words? Why not just plainly communicate this concept so everyone can grasp it?
The market is constantly receiving bad news lately and we’ve seen some cracks. We could, and I emphasize “could”, be seeing the beginning of a crisis.
It would be nice to know if we’ll be able to make money.
If we are entering a volatile time, what historically makes money?
The number one answer is trend following. Being in a crisis means things are going badly in one direction. We aren’t in a personal financial crisis if a credit card company asks us for a small payment every other month. We’re in crisis when all our credit cards want their money at once.
And because crises move in one direction, that means trends are strong in volatility. Which, of course, means following trends in either direction will produce a lot of money (alpha).
In short, trend followers never struggle in crazy times. They thrive during them.
What else works? Pull-backs. The pull-back strategies I’ve tested all do amazingly well in years like 2008. They work so well, in fact, that I normally throw 2008 out. The results are too good.
Anything else? Long-only TRADING SYSTEMS work. If we only go Long when the trend is up, for example, and we see a big downturn, a SYSTEM simply won’t take trades. It’s possible to break-even or even make money with long-only systems when the market is falling like crazy.
You know what doesn’t work? Long-only PASSIVE trading. Index funders suffer mightily when the market goes bad. They will lose almost all of their money if they sell out in a panic or they will not see a new high in their account for a long, long time.
No alpha for buy-and-hold market traders.
If we are seeing the start of a crisis, it would be smart to look at what systems should work well in that environment.
And we don’t need idiotic words to confuse the matter. We need simple talk and systems that make sense.
We’ll look at systems this week that work when the market doesn’t.
Talk to you soon.
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HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.