Education
Strategies are hypotheses, not guarantees.
Different approaches suit different market conditions. Understanding the assumptions behind a strategy matters more than finding a label for it.
Trend following
Seeks to capture sustained directional moves. Assumption: markets sometimes trend. Weakness: ranges and whipsaws.
Mean reversion
Assumes prices return toward an average. Assumption: temporary dislocations. Weakness: trends that do not revert.
Breakout
Looks for expansion beyond a defined range. Assumption: volatility clusters. Weakness: false breaks and slippage.
Carry and yield
Seeks to earn a differential or yield. Assumption: conditions remain stable. Weakness: abrupt regime change.
Event-driven
Focuses on scheduled data or corporate events. Assumption: reaction is measurable. Weakness: gap and liquidity risk.
Systematic rules
Uses defined, testable rules. Assumption: discipline beats discretion. Weakness: overfitting and regime change.
Evaluation
How to judge an approach.
A strategy is only meaningful in relation to its risk, its assumptions and the conditions in which it was tested.
What is the maximum drawdown in the test period, and was the period representative?
How sensitive is the result to small changes in parameters?
Were costs, spreads and slippage included?
Does the strategy rely on conditions that may not persist?
Can the assumptions be stated in one sentence?
Continue
Risk management is the strategy.
Read the education hub to understand position sizing, invalidation and the mathematics of loss.