This apologetic narrative is frequently found in blogs and social media: “I have traded for X number of years.” It is often used by those who have not kept up with progress in financial markets to convince an audience that they are worth attention. In trading, past experience does not always increase odds of success if there is no adaptation.
During the 1990s virtually all random long signals from a variety of technical indicators worked and made money until they stopped working after markets underwent a significant regime shift where low volatility dominates in uptrends and passive investing is very hard to beat.
Yet, some who traded during that time frequently use their experience in an apologetic way to justify difficulties in applying some old methods in current market conditions.
Some even make an appeal to past track records. While actual past performance should be respected by all means, it is never an indication of future performance.
For example, visual charting might have worked well in the past but nowadays it is not a profitable trading method due to low volatility and high randomness. Most technical analysis patterns are random formations without memory. I have a number of examples in my book Fooled By Technical Analysis from the last few years.
I do not care if someone traded for 50 years if the mode of operation is drawing lines on charts and looking at random patterns that take weeks or months to form. Someone out of college with a fresh idea may have better chances in this environment.
The industry nowadays is looking for fresh ideas and systematic strategies. Chart trading is no different than astrology where something may happen but eventually does not because something else happened that was not obvious up front.
Quantopian, Numeral and a host of other quant hedge funds know this and they never ask for trading experience but evaluate the merit of the idea only using proprietary methods. Even then profitability is difficult especially under liquidity constraints.
A sound argument against long track records is offered by the failure of CTAs to generate alpha recently after a long and profitable record, as shown in the chart below.
According to data from Barclay hedge, CAGR for top 50 CTAs in the last 9 years is below 0.5%. During the same period of time CAGR for S&P 500 total return was 15%. This colossal failure of CTAs has been attributed to many causes, for example crowded space, low volatility, use of “pedestrian strategies”, etc. But the causes can be summarized as follows: markets have changed and past track records are no longer a guarantee of future returns.
Therefore, the need for the apologetic narrative of the commodity trend-follower or the random chart pattern trader is understand. Trading differs from other professions where experience always has positive contribution. It may be counter-intuitive but in trading experience can have a highly negative contribution unless the trader keeps up with changing conditions in markets and methods used.
If you have any questions or comments, happy to connect on Twitter: @mikeharrisNY
Charting and backtesting program: Amibroker
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