Some nice points from here:
1. The future is unknowable and no amount of historical data analysis can change that. The real strength of CTAs is their ability to manage the risk of the unknown future.
2. CTAs seek to identify recurring trends in financial markets which they exploit through a systematic, rules based approach to trading. For all their powerful computers and complex algorithms, the basic strategy of most CTAs comes down to some form of trend following: essentially buying markets that are rising and selling those that are falling.
3. The reality is human beings are far from rational. We sell winners too early and hold losers too long. We pile into trades that are doing well and rush out of those that are doing poorly. This type of behavior creates trends which can be exploited through a systematic process.
4. Once a trend is established, the herding instinct takes over and investors begin rushing into trades that are doing well. This bandwagon effect sustains trends over time and often drives prices beyond rational levels.
5. The markets are not efficient or orderly. They are an endless battleground.
6. The mistake CTAs make is believing they can anticipate trends. The future is unknowable and no amount of historical data analysis can change that. The real strength of CTAs is their ability to manage the risk of the unknown future.
Covel note: CTA stands for commodity trading adviser. It is a regulatory term given to traders who are overwhelmingly trend following in style. It doesn’t mean the trader only trades “commodities”. It is a misnomer.
