What trading strategy suits you? Putting the woo-woo in systematic trading…

I just finished Mechanical Trading Systems by Richard Weissman, which focuses on (who’d have thought) design and use of systematic trading strategies.  The usual mix of momentum, mean reversion and intraday strategies are all here.

What I found more interesting was the author’s pairing of the strategies with trader personality.  The thesis is that certain types of strategy suit different people.  This goes along with my earlier post about return skew: though there are several ways to make money trading, the manner in which returns come can be hard for a person to stomach.

In sum:

  • Momentum: the ‘no vacation’ strategy.  Most trades lose (a small amount of) money, but a few home runs make up for all the losses and then some.  Key is that the home runs are completely unknowable, so you must be in the market at all times.  How do you feel about losing trades 5, 6, 7, 9, etc. times in a row?  Would you keep rolling with the strategy?  How do you keep faith it’s not broken?
  • Mean reversion: made for contrarians.  Benjamin Graham’s Mr. Market becomes over exuberant and depressed without end; your job is to be greedy when others are fearful.  Going against the crowd can be tough, particularly when you’re too early to the trade.  Trade returns tend to be more winners than losers, so that’s some compensation.
  • Intraday: the ‘quick minded’ strategy.  Basically either of the two approaches above (though most go for mean reversion in the intraday context), but with a much-compressed time scale.  Same sorts of emotional issues apply, but with the added stress of needing to make multiple decisions per day (and needing plenty of caffeine).  In my mind, this is where automating the trading becomes absolutely necessary.

As I mentioned before: all these are ways to make a buck.  The question is whether you, as a person, can handle the consistent losses (momentum), the discomfort of going against the crowd (mean reversion), and/or a very stressful lifestyle (intraday).

On a completely tangential note, it was interesting to see the slippage schedule used in the 2008 book was $100 per futures contract, per side.  The market is a lot cheaper these days…

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