Signals sometimes reveal that a trend has ended a little too early. Or in yesterday's trade, a little too late.
The problem of the Hard Right Edge
- A signal to go long is actually a signal to go short in a much more important price trend. The problem is you never know when or where than much more powerful price trend will begin. This is what you might refer to as the illusion of control. No matter how many technical indicators you place on your chart or how thorough your backtest reveals an edge, making each and every trade is an act of random faith that price will behave in the accustomed fashion. As we observed yesterday, things can go wrong all at the same time and there is little one can do to protect the downside than to keep risk to a minimum via position sizing.
- Profitable signals are usually pared by periods of random drawdowns which have no discernible beginning or end. Last week saw one of the best single day returns while this week saw all signals sucked into the false dollar bull run.
- Profitable signals appear at random intervals and can continue for an indeterminate period.
A few golden rule lists I have found both counter-intuitive and true: