The background of strategies : reading the markets.
What is behind a price move ? A change of behavior of buyers and sellers . Prices go up when buyers are more , or use more money (often borrowed) , than sellers . Everyone , following its experience and knowledge , combine an new event with those already happened in the past , and try to obtain a result ; this result is the background of their actions (to buy or to sell) . The same process of maths : the sum , for example , starts from two or more numbers , and the result is a different number : except for zero (which represents an unknown event , or an event that didn’t prelude to an action) .
The search of a link between actions and mathematics is the start of every algorithm applied to human behavior , which relies on a synthesis of old and new , and produces a newer too (the result). A third element is fundamental : time . The shorter the time of reaction to an event , most frequent are price changes . Let’s now give a look on strategies : when a market moves frequently , strategies appear to work less , producing results that in same periods lag those of market and benchmarks .
Obviously , event’s frequency is notable , and contributes to the fastness of prices change ( and influences the “liquidity” of an asset) . Formulas then must adapt themselves to scenarios , with a sort of artificial intelligence ( for example , adapting to beta of an asset , or its volatility, and so on) .
That’s why some strategies are , in some times , less lucrative than others : price moves are very frequent and tend to overlap the main trend , which is difficult to insulate from the “background noise” of short-term changes ; but , setting properly their automatic adapting , and combining them with others in different markets , absolute returns will be positive .
Diversification assumes now its real importance : cover different time evolutions of markets trends.
Definitively , a strategy tries to catch up the link between events an actions , translating that link in a formula , able to fit itself to markets developments , after an accurate backtest .
Are we , in our site , succeeding ? The answer is in strategies results (see Homepage). Don’t forget , anyway , relative disclaimers .