Quote from Ghost of Cutten:
That's because it IS the same as selling naked options. Mean reversion systems are short gamma. They make small wins most of the time, and run into extended trends occasionally, losing a pile of dough in the process. The fact that you don't know this means that you just haven't researched the characteristics of trading systems very much.
It stops working because a major trend gets started, and it is a trend-fading system. If you can tell when it goes off the rails, then why keep trading it in a hostile environment? Stop trading it as soon as you get the warning signal, and shift to a trend-following system instead. If you can tell when mean-reverting market environments turn into trend-following environments, they you really do have the holy grail!
