SI176: The Origin of Outliers ft. Richard Brennan

Jan 23, 2022

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Richard Brennan joins us this week to discuss how to spot potential outlier trades before they occur, the power of simple trading rules over complexity, why endogenous events move markets 90% of the time and news events are behind only 10% of large market moves, how Trend Following models safely reduce risk exposure automatically as drawdowns increase, how to approach correlated markets in your portfolio, how to achieve diversification with limited capital, the Efficient Market Hypothesis versus Adaptive Market Hypothesis, and the differences between Trend Following and ‘Trend Trading’.

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50 YEARS OF TREND FOLLOWING BOOK AND BEHIND-THE-SCENES VIDEO FOR ACCREDITED INVESTORS - CLICK HERE

In this episode, we discuss:

Spotting patterns among previous outliers
Simplicity over complexity
How little the news really moves markets
Professional Trend Following versus 'Trend Trading'
The ability of Trend Following models to automatically reduce open risk during drawdowns

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Episode TimeStamps:

00:00 – Intro

01:19 – A big thank you to listeners of the show for leaving your 5-star reviews on iTunes, and feel free to share this link with 3 of your like-minded friends:

https://top-traders-unplugged.captivate.fm/listen

02:41 – Macro recap from Niels

04:13 – Weekly review of performance

11:14 – Q1; Jonathan: What are the parameters that indicate a high chance of an outlier trade?

17:22 – Q2; James: Do you treat correlated markets as individual markets or group them together?

21:24 – Q3; Adam: One system has a better average performance when looking at the backtest, and another system has a worse average performance in its backtest while having a large outlier, making its overall returns higher. Which system is better?

24:14 – Q4; Irving: How can I trade a 100 markets as an individual investor with capital limitations?

29:07 – Q5; James: How do you approach correlation risk management?

32:39 – The differences between Trend Following and the more common term ‘Trend Trading’

38:24 – Expanding on the theme of hunting for outliers, and how Jean Phillipe Bouchard’s research was useful in understanding the nature of outliers

01:01:53 – Efficient market hypothesis versus adaptive market hypothesis

01:22:03 – What importance does it have that we’re changing the narrative around Trend Following?

01:25:32 – Benchmark performance update

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