Embrace cycles and use them to your advantage. Pretending they don’t exist and attempts to eliminate the part of the cycle you don’t like, the losing streak, doesn’t work.
The investing world doesn’t like cycles. It prefers investment strategies that produce consistent profits with little variation. I believe the collapse in interest rates intensifies this desire for consistent profits. One problem with investing in such strategies is that they’re likely curve-fit to the current market environment. In the short-term, they can do no wrong; nailing the timing on every trade — buying bottoms and selling tops. The risk, though, hides somewhere in the future when market conditions inevitably change. As a result, the strategy no longer syncs up with the markets and performance comes off the tracks, often resulting in blowups.
Other more robust strategies, not curve-fit to any specific market condition, tend to produce more variance in returns but survive in the long run through ever-changing market conditions. Curve-fit strategies don’t survive; one big loss ends it. Non curve-fit strategies don’t receive much love in the short-term (likely because there’s always a curve-fit strategy out there performing better), but everyone loves them in the long-term, especially during crises and unexpected market shocks.
The ironic thing is that non-curve strategies outperform almost always in the short-term, but almost never in the long-term. Unless you can predict the future (which you can’t), then in order to survive, you have to stick with the non-curve fit strategies through the ups and downs.
Curve-fit strategies often result in disaster. I empathize with the allure of investing in curve-fit strategies. People believe they can hop from one strategy to the next and never have to experience the losing streaks. However, dancing between raindrops doesn’t pan out so well in the long run. Curve-fit strategies tend to blow up suddenly, so you cannot see it coming and have time to get out. See the case of LTCM (https://en.wikipedia.org/wiki/Long-Term_Capital_Management).
Instead of trying to eliminate the variance in returns, namely the losing streaks, I believe a more realistic and healthier strategy is to embrace them and using them to you advantage. Accept them as part of the process. When you do so, your mindset shifts from hectic to calm; from wanting to chase short-term performance to loving and following your investing system like a Marine. You hope for the best, but if a losing streak rolls in, you take it in stride (because you knew it was coming sooner or later) and you use your dry powder to buy on the dip.
For more information, please see my paper on the advantages of investing in drawdowns (http://www.melissinostrading.com/pdf/Trend%20Following%20-%20Don’t%20Call%20it%20a%20Comeback.pdf).
Past Performance is Not Necessarily Indicative of Future Results
There is always a risk of loss in futures trading.
This communication is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of Melissinos Trading LLC. All information is subject to change without notice.