“This paper has been going around investing subreddits and it is complete BS – here’s why” (not OC)

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This paper/concept rises up every few years when markets are red hot. Investors are blinded by the current returns, think they can stomach more risk then they should and end up realizing losses cause they didn’t understand this approach and the associated risks.


Having done a bunch of past data testing myself I eventually came to realize that most of the strategies succeed or fail by avoiding a handful of days in the data. Problem is, those are nearly black swan events – there’s only a few in several *decades*. So there’s nowhere near enough data to say anything definitive about signals leading into them even if you assume there are signals leading in (I don’t believe there are). Rather, if your algorithm happens to skip one of those days, purely through chance, it’s going to look like a genius algorithm. But there’s no reason to think that having avoided one bad trading day and therefore beating everything else by 20% is repeatable. Even if there were recognizable patterns to this stuff you wouldn’t know it from just a couple data points.


2 Things: 1) The notion that bonds and equities are inversely related isn’t really right. While it holds in a lot of historical cases, it’s not really as simple as that. Bonds are a good hedge from equities when interest rates are high and are expected to trend down, that just often coincides to when equities are overheated in a lot of cases. However, we are currently in an environment where this is not the case. Equities are exhausted but bonds are a bad buy b/c interest rates are crazy low and expected to rise. The flee from equities in this case shouldn’t be bonds, rather commodities. If you just want to pivot inside equities, look to utilities or banks instead of the high growth tech that everyone is piling into. 2) I don’t have the tools to do it easily and too lazy to grind it out but I would be curious to see what this looks like back testing… Buy the 3x ETF but also roll calendar put spreads 50% OTM, 30 dte for short leg and 60dte for long leg. When short expires, rinse and repeat. I have a hunch that this would backtest well and protect you from black swan events while not costing you a ton for the protection. I could be wrong but it’s just a bunch. May have to tinker with the quantity of spreads based on size of position. One last caveat you have to assume is that you can a decent fill on these options which isn’t always the case with levered underlying options which often have large spreads. In this case you could proxy it buying more options on the underlying at maybe 25% OTM instead.


The fact that this paper exists does not mean that this strategy should be necessarily followed and implemented. It’s an interesting paper but clashes of course with the difficulty in entering/exiting the market in proximity of the MA. A simple description of the strategy is not the same as its successful implementation. I find the work worth a read but then you have to face the reality of things.


It was pretty hilarious when I saw people talking as if this was a legit strategy. Anyone with the slightest clue of what they’re doing could tell you that TA is bullshit and MAs are horrendous for anything but visualising historical trends. Basing your trades on a 200 MA is the easiest way to lose money.