The Professor on the Science of Trend Following

In the second episode of "The Algorithmic Advantage" podcast, the conversation with Rich, a seasoned trend following trader, delves deep into the intricate world of quantitative trading. The episode unfurls as a journey through Rich's fascinating transition from traditional finance to the realm of systematic trend following, driven by his passion for intertwining scientific principles with economic theories.

Rich's narrative begins with his early days in finance, where he was thrown into the deep end of risk management and investment processes. This exposure ignited his interest in fundamental investing, which eventually evolved into a more sophisticated approach—systematic trend following. He describes his dual path in finance and science as parallel journeys that eventually converge, enriching his trading philosophy.

The core of Rich's trading philosophy is his view of financial markets as competitive landscapes, teeming with various participants whose behaviours collectively drive market dynamics. He delves into the concept of agent-based models, analysing the interplay of individual and collective behaviours in influencing market prices. Rich's perspective is unique in that he sees a significant portion of the market as engaged in predictive trading, relying heavily on pattern recognition and backtested data to anticipate future trends. However, he positions himself differently, focusing on the less predictable, more chaotic aspects of the market.

Rich's approach to strategy development is marked by an emphasis on simplicity within complexity. He uses the metaphor of a pendulum to explain different levels of complexity in financial markets, from simple predictable systems to highly complex, chaotic ones. His strategies aim to navigate this complexity through risk mitigation rather than prediction, adopting a trend-following approach that capitalizes on the market's inherent chaos.

A significant part of the conversation revolves around the concept of complex adaptive systems and how they apply to financial markets. Rich describes these markets as systems characterized by time asymmetry and entropy, driving them forward in a manner akin to the natural progression of living systems and the universe. He sees financial markets as fractal structures, where small and large elements interact dynamically, creating unpredictable, chaotic patterns.

Risk management and diversification are critical components of Rich's trading strategy. He discusses the importance of positive skew in trade distributions and the necessity of cutting losses short while letting profits run. His method involves extensive diversification across various markets and systems, adapting to the medium to long-term trends that characterize these fractal market structures.

As the episode nears its end, Rich offers sage advice to aspiring traders and those early in their systematic trading journey. He stresses the importance of continual questioning, self-reliance, and the pursuit of challenging, rigorous learning. He underscores the value of mentorship, encouraging new traders to learn from experienced ones and build upon their knowledge.

This episode presents a compelling narrative of Rich's profound understanding of financial markets as complex adaptive systems. His insights into the various levels of complexity and the interplay of predictability and chaos in the market offer a unique perspective on systematic trend following. Rich's story is not just about trading strategies but also about a relentless quest for knowledge and understanding in the ever-evolving world of finance.

Get in touch with Rich:

w: www.eccm.com.au / www.thealgorithmicadvantage.com

x: https://twitter.com/RichB118

li: https://www.linkedin.com/in/richbrennan118/