007 - David Bush of Alphatative - Mean Reversion to the Beat of the Drum

October 14, 2023
The Algo Advantage
Low Risk Mean Reversion Trading in Mega Caps

On Episode 7 after a number of discussions with trend followers we peek over the fence at how the other half live and talk to David Bush about Mean Reversion. David trades mega-cap US equities with a very strong focus on risk management. He includes a specific strategy in his portfolio that kicks in to profit and hedge his positions when other strategies might be entering a difficult regime. David is an accomplished musician and we have an interesting chat about the relationship between music and trading! He mentions a very interesting style of music which I was keen to look up, so I'll include the links here. Enjoy the show!

https://en.wikipedia.org/wiki/Johannes_Ockeghem

The Musical Beginnings: A Symphony of Patterns

David's journey in trading is as unconventional as it is fascinating, beginning in the world of music. As a full-time musician, particularly a drummer, Bush developed a keen sense of pattern recognition and rhythm. He shares an intriguing incident from his early 20s, where a casual encounter with a stock market ticker at his father’s house sparked his interest in trading. The ticker, with its constant flow of numbers and symbols, resonated with him, much like musical notes on a score.

Transition to Trading: Harmonizing Music with Markets

The transition from music to markets wasn't immediate but rather a gradual realization of the similarities between the two. David discusses how pattern recognition in music translated seamlessly into the trading world, especially in technical analysis. He likens the anticipation and execution in trading to the dynamics of jazz, where improvisation and structure coexist.

The Trading Crescendo: From Discretion to Quantitative Strategy

David's early trading days were marked by a discretionary approach, heavily reliant on technical analysis. However, he soon realized the limitations of manual trading, especially during the taxing periods like the 2008 financial crisis. This led to a pivotal moment in his career – the decision to delve into quantitative trading. By embracing systematic trading, David was able to harness computing power for back-testing and developing trading models, significantly enhancing his trading efficiency.

The Crypto Interlude: Embracing a New Financial Symphony

Later in his career, David's intrigue with cryptocurrency, particularly Bitcoin and Ethereum, opened a new chapter. His exploration into crypto was driven by the desire to understand and leverage the unique properties of these assets, such as decentralized nature and network effects. He shares his views on the potential of blockchain technology and the transformative impact it could have on various industries.

Risk Management: The Art of Trading in Tune

A significant portion of the discussion centres around risk management in mean reversion trading. David emphasizes the importance of simplicity in strategy design, avoiding overcomplication, and the need for a robust regime identification process. He stresses that trading, much like music, requires an understanding of when to be aggressive and when to be conservative, akin to understanding the ebb and flow of a musical piece.

Conclusion: A Diverse Orchestra of Trading Approaches

The episode concludes with reflections on the diverse approaches to trading. David and the hosts discuss the importance of acknowledging different strategies, whether in trend following or mean reversion. They underline that in the world of finance, much like in music, there is no single path to success – it’s the harmonious blend of different styles and strategies that creates a successful trading symphony.

Listeners are left with a deeper understanding of the intricate relationship between art, particularly music, and the science of trading. David's journey serves as a testament to the power of cross-disciplinary thinking and the unique insights it can bring to the world of finance.

Back-testing Engine Mentioned: ⁠RealTest (mhptrading.com)⁠

Data Supplier Mentioned: ⁠Norgate Data - Overview

 

Get in touch with David:

Crypto Substack: https://rektelligence.substack.com

w: www.alphatative.com

x: www.x.com/Alphatative

li: www.linkedin.com/in/davidtbush/

Questions? Comments? Suggestions? We'd love to hear from you...
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