Better System Trader

And we're back for the final episode in this 3-part series on building Mean Reversion strategies with Cesar Alvarez from Alvarez Quant Trading. In the 1st episode we discussed the goal of Mean Reversion trading, how to select a trading universe, a number of effective techniques to measuring Mean Reversion and how to combine indicators to identify better quality trades. In the 2nd episode we discussed market classification, trade ranking, exits, order types, position sizing, risk control and much more. In this 3rd and final episode, Cesar answers all your questions, covering a wide range of topics, including: Mean Reversion in markets outside of Stocks, Controlling risk during market sell-offs, gaps and being overweight in particular sectors, Performance of Large caps vs Small caps, Ranking Mean Reversion setups, Shorting strategies, Readjusting strategy parameters and measuring robustness, Balancing Mean Reversion in a portfolio of other trading styles, Tail risk, leverage, options, performance monitoring and so much more!   Disclaimer: Trading in the financial markets involves a substantial risk of loss and is not suitable for everyone. All content produced by Better System Trader is for informational or educational purposes only and does not constitute trading or investment advice. Past performance is not necessarily indicative of future results.

A few weeks ago I got the fright of my life. I found myself in a situation where I could potentially be crushed by a car, or perhaps even a bus or truck. Find out what happens and how it applies to tracking the performance degradation of trading strategies (before they kill your account).   Disclaimer: Trading in the financial markets involves a substantial risk of loss and is not suitable for everyone. All content produced by Better System Trader is for informational or educational purposes only and does not constitute trading or investment advice. Past performance is not necessarily indicative of future results.

I’ve just arrived back home from a few weeks in the States, I had a great time there but it’s also good to be home. I’m a bit jet-lagged today so let’s hope what I share today actually makes sense! A few weeks ago I had the honour of speaking at the ATAA members meeting here in Melbourne. I presented for about an hour and the topic of my presentation was ‘7 practical tips to reducing drawdown’. In this weeks Trading Thought I want to share a quick story from that and how it applies to Mean Reversion in low volatility environments. In part 1 of the Mean Reversion series, Cesar made a statement about Mean Reversion strategies not performing so well in low-volatility market regimes, and I received a number of emails asking what type of strategies DO work in low volatility environments, so... In this week’s Trading Thought I want to share a quick little sneak-peek into the next Mean Reversion episode with Cesar, due for release in a few weeks, where he answers this question, plus much more. It’s only short, but let’s take a listen to Cesar sharing what he's found to work in low-volatility market regimes.   Disclaimer: Trading in the financial markets involves a substantial risk of loss and is not suitable for everyone. All content produced by Better System Trader is for informational or educational purposes only and does not constitute trading or investment advice. Past performance is not necessarily indicative of future results.

And we're back for the 2nd episode in this 3-part series on building Mean Reversion strategies with Cesar Alvarez from Alvarez Quant Trading. In the first episode we discussed the goal of Mean Reversion trading, how to select a trading universe, a number of effective techniques to measuring Mean Reversion and how to combine indicators to identify better quality trades. If you haven't listened to that episode yet, you should check it out first here. In this 2nd episode in the Mean Reversion series, Cesar will be sharing: How to classify market conditions and adjust Mean Reversion strategies to the current market, Tips to choosing trades with a higher probability of success when you have more trades than your account can take, How the maximum number of positions you trade affects the role of luck on trading results and how to produce more 'reliable' results instead, Why it can be a good idea to have different strategies that enter at market and on limit orders instead of just one or the other, The impacts of stops on returns and why they don’t often protect you from the really big losses, Implementing multiple exits, what works best in Mean Reversion (and what to avoid) and testing exit combinations. Watch out for the 3rd episode in the series, where Cesar answers all the questions submitted by Better System Trader listeners.   Disclaimer: Trading in the financial markets involves a substantial risk of loss and is not suitable for everyone. All content produced by Better System Trader is for informational or educational purposes only and does not constitute trading or investment advice. Past performance is not necessarily indicative of future results.

Have you ever wondered: Why the word "abbreviate" is so long? Why are wise men and wise guys opposites? Why is it called quicksand if it takes you down slowly? Where do forest rangers go to "get away from it all?" Why is it that when we transport something by car it's called a shipment, but when we transport something by ship it's called cargo? I'm sure there are reasons for all of these, but on the surface they don't seem to make sense. What about stop losses, do they make sense? We often hear the trading rule of 'always use a stop loss', no matter what, use it everywhere, but… Does it actually make sense to ALWAYS use a stop loss? Or are there occasions when using a stop loss DOESNT make sense? And if so, how do you handle that? How do you manage your risk? In this week’s trading thought, we’re going to review a chat with Dr Ernie Chan about stop losses, and we discuss these exact points, so let head on over to Ernie and find out if it makes sense to ALWAYS use a stop loss.   Disclaimer: Trading in the financial markets involves a substantial risk of loss and is not suitable for everyone. All content produced by Better System Trader is for informational or educational purposes only and does not constitute trading or investment advice. Past performance is not necessarily indicative of future results.

As you probably know, we’re currently focusing on Mean Reversion trading strategies. In episode 127, Cesar Alvarez shared a number of techniques to measuring Mean Reversion and identifying setups. There was probably close to 10, maybe 12 different ideas Cesar shared with us, so there are lots of ways to measure Mean Reversion when looking for trade setups. Are any techniques better than others? In this weeks Trading Thought I want to add a little bit more to the insights Cesar shared with us on Mean Reversion setups by referencing another very popular Mean Reversion episode I did with PJ Sutherland, episode 62. In this weeks 'Trading Thought' PJ is talking about measuring Mean Reversion setups and a technique where he ‘really started to see phenomenal test results’ -  who doesn’t want that right? So what is this technique? And where did PJ see these phenomenal test results? Take a listen as PJ explains it to us...      Disclaimer: Trading in the financial markets involves a substantial risk of loss and is not suitable for everyone. All content produced by Better System Trader is for informational or educational purposes only and does not constitute trading or investment advice. Past performance is not necessarily indicative of future results.

Cesar Alvarez, a Mean Reversion specialist, discusses the steps to building a mean reversion trading strategy, the importance of selecting a trading universe, techniques to measure mean reversion, combining indicators for better trades, and why smooth equity curves may not be the best strategies. They also explore the appeal of mean reversion trading for quick profits and discuss liquidity, transaction costs, and using filters and indicators for trading setups.

It seems from the emails I’ve been getting lately that more and more traders are becoming concerned about the state of the markets, especially the stock markets, which is understandable. And the concern is really around what’s going to happen when the stockmarkets start falling. What could happen to their strategies and accounts and how can they prepare for it now? How can they protect their portfolios? One form of protection that often comes up is using diversification to reduce portfolio risk. However, a common question that is raised is how to actually go about diversifying? Is there more protection in diversifying across markets, or staying in the same market and diversifying across strategies? In this short piece of audio, Perry Kaufman discusses how he looks at diversification, and it’s something you may want to consider when you’re thinking about how to protect your own trading account and portfolio in a market downturn.   Disclaimer: Trading in the financial markets involves a substantial risk of loss and is not suitable for everyone. All content produced by Better System Trader is for informational or educational purposes only and does not constitute trading or investment advice. Past performance is not necessarily indicative of future results.

In this weeks ‘Trading thought’ we’re going to discuss an issue that all traders have to face... How do you know when to stop trading a strategy? A common approach is to wait for a strategy to reach the maximum historical drawdown and then either stop trading the system or look at modifying it or optimizing it, but... There are a couple of problems with that approach: Once the strategy has hit that drawdown level, the damage is already done, you’ve already taken a series of losses to get to that level, What if you stop trading the strategy and it recovers from the drawdown, you missed out on the recovery. When we have a system that goes into drawdown, we never really know if it’s the beginning of the end for that strategy or if it will be a drawdown within expectations, so it can be tricky issue to address. Can this be managed differently? Are there warning signs to watch out for that can tell us if our strategy is sick or healthy and can we manage these sick strategies differently without having such an impact on our trading accounts? In this episode we’re going to hear from Alan Clement, who is going to share some ideas on measuring system health, so take a listen to our chat with Alan.   Disclaimer: Trading in the financial markets involves a substantial risk of loss and is not suitable for everyone. All content produced by Better System Trader is for informational or educational purposes only and does not constitute trading or investment advice. Past performance is not necessarily indicative of future results.

Trade management is a critical component of a trading strategy. It can often be the difference between a profitable trade and a loss... However many traders focus on the entry only and leave trade management as an afterthought. In episode 49 of the podcast, Linda Raschke, said "trade management is probably the most neglected area of system development". In that episode we focused on Linda's approach to modelling the markets but in this episode Linda is back to discuss trade management and exits, including: Why trade management is such a neglected aspect of trading, How to model different types of exits and the impact of market environments, How volume and breadth measures can give clues to the tone of the market, and How to use the power of relative strength to target the best markets to trade.   Disclaimer: Trading in the financial markets involves a substantial risk of loss and is not suitable for everyone. All content produced by Better System Trader is for informational or educational purposes only and does not constitute trading or investment advice. Past performance is not necessarily indicative of future results.