How Trading Has Changed Over The Years
This is a summary of my YouTube video on how trading has changed over the years.
Trading is a complex subject, and analyzing how it has changed over the years requires a paper or even a book for an in-depth analysis. In my video below, I focus on how changing market regimes have affected simple trading strategies and some of the drivers behind those changes.
Summary
- In the 1970s and 1980s, traders could use a fast-moving average to trade the markets and realize absolute alpha.
- Around the mid-1980s, the fast-moving averages stopped working, and traders were forced to increase the lookback periods, resulting in higher drawdowns while the alpha disappeared.
- In the stock market, traders were forced to go long-only since the short side became unprofitable.
- After about 2012 and due to quantitative easing, the long-only strategies have underperformed the S&P 500 buy and hold.
- The reason trading has become harder is that markets are more mean-reverting.
- With the advent of algo trading, the positive serial correlation was arbitraged out of the market.
- Curve-fitted strategies using indicators with high lags generate large drawdowns when market regimes change.
- Trading is no longer what it used to be in the 1970s and 1980s. By the 1990s, there were significant changes in microstructure, operation, and dynamics.
Nowadays, the only possible alpha comes from leverage because strategies can only generate better risk-adjusted returns.
After the YouTube video description, I have included links to articles with more detailed analysis.
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Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
