Building a Winning $TICK System Part 1
- Thread starter Adaline
- Start date
mmillar, that is referring to the trend followers who make all their money in moves that shouldn't be statistically possible if the markets had a normal distribution of price changes.
For example, statistics may predict that a $2 move in Soybeans over a particular amount of time has a 0.5% chance of happening if price changes were "normally" distributed.
In reality there might be a 1% chance of Soybeans making that $2 move, presumably because people are crazy and manias are bound happen. This tendency to have more frequent "outliers" is referred to the price distribution as having "fat tails" since large price moves which land on either extremes of the bell curve are more likely than normal, even if only slightly more likely.
So the trend followers make this observation and said "what if I can make a LOT of money when these moves happen and suffer through the dreadfully numerous small losses?" That's why a trend follower's position sizing and pyramidding is so important. When these large moves happen they are (hopefully) highly leveraged and positioned to take full advantage of the big moves, and these rare situations offset all the small losses.
The entire strategy relies on this "fat tails" characteristic of the markets though. If the world ever becomes normal, trend following won't work anymore ;-)
For a good primer on the bell curve and volatility, check out any intro to statistics....hope this helps!
For example, statistics may predict that a $2 move in Soybeans over a particular amount of time has a 0.5% chance of happening if price changes were "normally" distributed.
In reality there might be a 1% chance of Soybeans making that $2 move, presumably because people are crazy and manias are bound happen. This tendency to have more frequent "outliers" is referred to the price distribution as having "fat tails" since large price moves which land on either extremes of the bell curve are more likely than normal, even if only slightly more likely.
So the trend followers make this observation and said "what if I can make a LOT of money when these moves happen and suffer through the dreadfully numerous small losses?" That's why a trend follower's position sizing and pyramidding is so important. When these large moves happen they are (hopefully) highly leveraged and positioned to take full advantage of the big moves, and these rare situations offset all the small losses.
The entire strategy relies on this "fat tails" characteristic of the markets though. If the world ever becomes normal, trend following won't work anymore ;-)
For a good primer on the bell curve and volatility, check out any intro to statistics....hope this helps!
