"Well sure the correlation could break down. Sure the spread could power through the previous high or low without pausing or hesitating there. But that's not typical behavior, not in my experience at least. Of course it happens, but if you're not going to fade the edges, the extremes, then what is your trading based on?"
A simple one. I gamble volatility bets (old school delta hedged vanilla spreads) on underlyings with the less correlation I could find. It doesn't mean there is no correlation, it means I don't play it. Each underlying is managed with its own risk/reward.
Sometimes I earn money, sometimes I lose. But I'm still alive.
"Sure there are other approaches such as trend following, but that one doesn't work for me. That's not to say it won't work for someone else. But personally I like knowing historical parameters and fading them at extremes."
Make no mistake, I'm THE worst trend follower in the world (I may deserve an article in Forbes for that). That means you can make money if you do exactly the opposite position I take as a trend follower. It's definitly not a way for me to trade.
"Ah yes, LTCM. Those were the days weren't they, when a mere $4 billion loss threatened to bring down the whole financial system? Hard to believe it was only ten years ago."
Yeah, without talking about so called Nobel prized managers, it has been built on correlation strategies. There are a lot of examples of so called "market neutral" funds collapses. They always seemed to reduce risk by a long/short strategy. Sometimes...
BTW, there no such a thing than a Nobel prize in Economic sciences. It's The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.
"Well like LTCM, I lose money too. The difference (I hope) is that I practice sane risk management. That may change of course when I win that Nobel Prize."
I agree. Since risk can be divided in two components: uncertainty and exposure, and since we are not always able to deal with uncertainty, exposure is and keep being the component we always are able to manage.The size of each position has to be fitted in term of consequences.
If you win that Nobel Prize, stop trading and do lectures. You will earn much more money ( as they actually do)..
"But really, the point I'm trying to make is not this strategy or that strategy. People come here to pick up helpful hints, and the best one I can give is to encourage them to use their own eyes and their own ideas and, above all, to trust their own powers of observation. The ability or willingness to do that is IMHO the number 1 trait that separates successful traders from their less-successful brethren."
I agree (twice). And your posts are useful and helpful.
