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Just curious if I am the only one concerned that “long only” strategies that have performed so well over the last nine months (and really, the better part of the last decade or more) may NOT do so well if 2021 turns out to be the sobering correction that many are predicting? As a strategy manager (or a subscriber), how do you prepare for possible market conditions that you don’t have any recent historical price data to validate your strategy against?
Just throwing that out there and would love to hear your thoughts.
Investing decisions should never be based on what you think the overall market is going to do. Focus on the individual companies that you invest in and know what you are buying. Forget market timing or trying to be an economist. That’s a fools game.
I think that advice is more valid for trading on fundamentals, but my understanding is a number of (most?) strategies here trade algorithmically, which is more what my question is about. Many if not all algo strategies are of course validated/tuned using historical price data, so how is a change in overall market direction handled when the trend you’ve tuned/backtested against is no longer relevant?
“when the trend you’ve tuned/backtested against is no longer relevant?” It probably won’t be handled very well, but hopefully it at least will be handled somewhat, depending on how the algo is works.
Ideally algos/strategies should be validated/tuned on longer time periods that include downswings. A great one to tune on is the 2020 covid crash (it’s also recent and should definitely be included). If this is the case, the algo should handle downtrends better.
i know you did very well during that time and hats off to that. In my opinion covid crash was relatively easy (not belittling your achievement because it indeed was one where one could be wiped out) because 1) the market had shown weakness just before that and most good long systems would have been on cash when it happened. Not saying the systems would have seen the covid crash coming, but market weakness existed just before that. 2) Notwithstanding the intensity of the crash , it was shortlived as well. Anyone following systematic algos would have got in april mid or so. A more serious test would be a prolonged bear market which we have not seen in modern times. Even the one during 2011 ( if i rememeber right) which lasted few months would be a good test. 2015 where market was whipsawing would be another scenario. of course 2008 would be a a good test as it had numerous bear market rallies. 2001/02 is even more of severe due to the long period. But the point is in spite of all these drops, market rises, and it is always be on the right side of the market which is long. And a good system will guide you through all these but of course with higher drawdowns.
Yeah agreed, whipsaw markets are really hard for algo systems. The covid crash was intense but once the trend was identitied it lasted for a while (down), then it switched to up. That is easier than whipsaw markets (like 2015).
In trading there are trends in both bull and bear markets.
Bull is the current dish.
The market dropped 600+ today.
There will be opposite moments in a bear market.
It is on the trader to seek out those moments.
Exit and entry is the determining factor in all markets.
In my humble opinion, you need to have a hedging plan in place in order to manage your risk.
Hedging strategies typically involve derivatives, such as options and futures contracts as you may as well know.
Currencies can also be used for that matter depending on what you’re trading.
