Suppose we dipped a large bucket into a pool of traders, of which you and I are a part, to obtain a statistically significant sample. From such a sample we might conduct all sorts of analysis to determine any number of data points. Average account size, annual returns, percentage of profitable trades, survival rate, and strategies employed would all be of interest.
Despite the wide variety of trading strategies used by the masses, I suspect we could narrow them down to two broad categories: trending and mean reversion.
The trending crowd seeks to exploit the continuation of price movement. They live on momentum and the propensity of prices to trend in one direction or the other. The mean reversion crowd often stands at odds with trend seekers as they pray to the market gods for non-trending conditions.
Some may wonder whether it is wise to implement trending and mean reversion strategies simultaneously. The idea behind such a two-pronged approach is that at least one strategy should be thriving regardless of conditions. And, in the event your management is top notch, you may have some months where both strategies produce a profit.
Consider the condor enthusiast for instance. Their Achilles Heel comes in the form of rapidly rising or declining markets. To combat these adverse conditions they may experiment with running a strategy designed to profit in strong trending markets concurrent with their monthly condors. The successful implementation of this dual approach could serve to smooth returns by lessening the volatility of your equity curve. Of course, as a prerequisite for such an approach one would want to make sure they have a knack for both identifying and exploiting directional moves. Those lacking such a skill would probably be best off sticking to their non-directional niche and avoiding the whole directional game.
It also might be worth mentioning that each strategy should do well when implemented on its own. The combination of two crappy strategies won’t magically produce a winning approach.
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The directional skill described are not always necessary. Condor traders can buy strangles in the same underlying as the condors.
It’s costly and cuts profits, but with this strategy, there is no such thing as a market move that is too large. Imagine condor traders profiting from a black swan move!
Disclosure: These days, I am not using insurance.
We’re in agreement on this one. No doubt there are a variety of ways to hedge off directional risk for the delta neutral among us. I seem to remember a kindly blogger of days past enlightening the condor trading masses on kite spreads:)
In fact, if well-designed it is possible that both the trending and the MR strategies will be profitable simultaneously. Trends/momentum/RS are dominant over intermediate time frames (about one month to one year), while MR is dominant at short time frames (a few weeks or less) and, to a lesser extent, very long time frames (beyond one year). Moreover, some instruments are more susceptible to short-term MR (e.g. stocks, bonds) while others have a greater tendency to trend (commodities). By applying trend and MR strats across different time frames and instruments, it is possible to to make money with both much of the time.
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