On trading

In this post I'll talk about trading/"investment", but this is purely for fun, discussion and research, and it's not professional advice. Your investment decisions are your own responsibility.

Maybe you've heard about "trend following", and about "mean reversion". If you have, chances are you're keen on one of them, and despise the other. If you haven't, then you should read about them to understand what I'm talking about.

The two ideologies are quite different (in my view, opposite).

Here's a fun comparison between the two:

Trait Trend following Mean reversion
Use case Price moves in a clear direction for an extended period (either up or down). Price moves sideways/zig-zags (is bound by a channel, not moving outside of it).
Worst nightmare Zig-zagging. Enters a position thinking the price movement will continue, only to exit it when it reverses. Paradigm shifts. Suppose a company goes bankrupt - the price will never return to its long-term average.
Return distribution skew Positive skew: many small losses, but occasional great gains Negative skew: many small gains, but occasional great losses
When others use the strategy Self-reinforcing. The more followers, the stronger the trend. Self-annihilating. The more reversionists, the smaller the intervals to swing around the mean.
Relationship with market Expects and causes market volatility. Expects and causes stabilization.
Market emotions Goes with them. Goes against them.

After reading my point of view, I hope you realize that both of these philosophies have merit, and that you won't put blind trust in any of them.

I will mention that I found out about these two in the book Systematic Trading by Robert Carver, which I greatly recommend if you dream about building an automated trading system.

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