Process, Process, Process...

Improve, Improve, Improve...

Hey, I am making some progress in the process space, so here is the state of affairs. First step in the process is the trader herself or himself!

I. Your inner voice

1.

I need to go through my process to see it; not somebody else seeing it.

I follow two good traders and that is fine. Before I go through my process, I shut down fintwit. And I am only following two traders, more than that is too confusing to me.

2.

Second, I go through the same process every day, THE SAME process every day. That builds conviction for me.

3.

I need to be 100% neutral before I start doing the process. A fresh start every day. That is important because the market can change very fast.

4.

Believing what I am seeing without with your feelings in mind: This is the most important part, very often I see things, but do not act on them, because often I do not believe what I see.

This is the most important when it comes to being in the right mindset:

https://twitter.com/ReThinkGroup/status/1660713481505521666

“Learning to leverage true “gut feeling” (intuition) is the secret to everything. Novices use linear, explicit steps. The more of an expert we are, the more the knowledge gets pushed into the body. Visceral intelligence, fuzzy trace theory, intuition … an edge to cultivate.”

“Intuition is unconscious pattern recognition-- almost like muscle memory. As you trade more (or gain experience in any area), you develop a feeling of what is "right" or what's going to happen. Learn to understand the physical signals of expert unconscious pattern recognition + listen to these signs.”

“How do you parse the difference between intuition and irrelevant impulse? One way to discern if a feeling is intuition or impulse is staying power. Intuition will feel calm and repetitive, like a sense of what is right. Impulse feels urgent and is more prone to rapid change– it’s volatile. Any time you feel like you've "got to do it", it's almost certainly not intuition.”

And the most important part:

“If we work at it, we can all learn to recognize true intuition vs. impulse. First is pattern recognition based on experience, latter is desire-driven.

To rephrase:

Intuition is calm (the feeling is calm; it does not force you to take action!) pattern recognition based on experience.

Impulse is a forcing feeling based on desires: “I have to do it.”

The harder I force myself “I have to maket it as a trader”, the less I am able to access intuition.

I need to be fine with myself. The best traders I am following are 100% fine with themselfs.

Second step is to see the market regime. Not every strategy fits every market regime, so to get the market regime right will make all the difference!

II. Market Regime: Inflation

Inflation going up or down?

Lower inflation can only mean: Goldilocks (GDP up, Inflation down) or Deflation (both going down).

Higher inflation can only mean: Reflation (GDP up, Inflation up) or Stagflation (Inflation up, GDP down).

What is strong in what environment:

https://optionbit.blog/what-works/?token=eyJ0eXAiOiJKV1QiLCJhbGciOiJIUzI1NiJ9.eyJpc3MiOiJodHRwOi8vd29yZHByZXNzLmNvbS9lYXJuIiwic3ViIjoxOTg3MjI5NDMsInVzZXJfaWQiOjIzNTQ2MDI2NSwiYmxvZ19zdWIiOiJhY3RpdmUiLCJzdWJzY3JpcHRpb25zIjp7IjExNzY3MiI6eyJlbmRfZGF0ZSI6IjIwMjMtMDYtMTkgMDY6NTE6MzYifX19.MjWW9oiE09b5jIKs4yl0IoungrlE2QyMVZqeCthSet0

III.a Market Regime GDP

Now GDP: I think GDP that is reported and forecasted by Macro is very, very dangerous. I followed a trillion macro services and not one (!) got it constantly right.

Also, at inflection points often GDP does not matter at all! It matters what the market is expecting (GDP up or down / FED policy). The data very often does not matter, but the reaction of the market to the data!

I did a deep Backtest up to 1998 in here are the results.

The market front runs GDP!

If you have a deep look on the following chart, you see that the market front runs GDP on inflection points.

III.b Micro Quads

On the right side of the following Chart are instruments divided by 4 buckets (Quad 1 - 4). On the left is the SPY weekly. The numbers show the Quad of that week —>

The four boxes on the right are filled with industry groups, sectors and other instruments (for example UUP / the dollar in the Quad4 bucket).

III.c Results Micro Quads

• Those instruments in the boxes are selected based on their signal and trend strength! Quads 1 and 2 have higher beta instruments, somewhat also in Quad 3. Quad 1 and Quad 2 have the strongest trend and signal strength.
  
  Most macro services I follow make the following mistake —> every instrument they use to measure the regime with have the same signal and trend strength weight. This is a huge mistake, because depending on the factor you measure, signal and trend strength can vary tremendously.
  
  Also, it is important to how to measure the signal and trend strength. Price, volume and volatility are not cutting it! What is much more important is relative strength and volatility contraction patterns (on instruments that signal and trend well) relative to the volatility of the overall market at the same time (!!!) even when price is not yet bullish trend (but should be above the 10 day weekly moving average).
  
  Here is the biggest secret:
  
  a) Only use instruments to measure the regime that have high signal strength to determine the regime. Only trade instruments that have high trend strength (so forget it to go long defensive stocks in a deep (= volatility trending!) Quad 4, they are strong to the last minute just then to tank with the market! The reason is simple, they have very weak trends, defensives have factor loadings that trend terribly!
  

  b) When the market is at local extremes the signals are the strongest: right when everybody is scared to death or when everybody is really complacent. Combine with positioning via Jason Shapiro @Crowded_Mkt_Rpt and you got a very, very strong signal. Combine with https://twitter.com/BenzStanzie shorter term and it even gets better (those are the two traders I follow!).
  
  The strongest signal is —> SPY pulls back (the harder the better) and Quad1 and Quad2 exposures stay strong + are (optimally) less volatile than the SPY —> long signal.

  
  The SPY is strong (the stronger the better) and Quad4 exposures start to get strong (or all 4 Quads are strong at the same time!) —> hedge, cash and short signal.
  
  I tested back to 1998 and I can say the following paper has it right 100% —>

So, if you use for example the value (3.13, see above table) factor to determine the regime and value has the same weight as for example high beta (13.68) you do something terribly wrong! Also the trend strength of value is only mezzo mezzo.

There is a reason why breakout traders wait until high beta is strong (and relatively strong to the market) and has volatility contraction patterns. They make a killing exactly then because they get the long signal right and on top of that they are in a factor that trends super well.

• Quad 3 exposures can trend well, but for this inflation really needs to be high. When Quad 3 is in play the market is weak, so quad3 exposures will backfill breakout areas, position size and scaling into the position are important when Quad 3 hits. Also, a combination of Quad 3 longs (for example XLE) and shorts (Short on IWM) are important when Quad 3 hits.

• Quad 4 exposures usually do not trend well, only the dollar and somewhat TLT trend well but I am still experimenting here, so there could be other Quad 4 instruments that trend well.

• What I can see is that the market changes fast, very fast from week to week. A three month forecast of GDP is therefore not going to cut it for a trader.

• Exposures (industry groups) that are strong in a market drawdown and strong out of the gate are the ones that have the best performance and longest advance if they come from the Quad1-2 bucket (and a little less for Quad3 bucket).

What was strong out of the gate in the covid rally?

ARKK and Software Infrastructure!

Like here (long signal in covid rally):

And here:

Or here:

And like recently here:

In the above drawdown Semis have been strong:

Now let us look at the performance of the industry groups that have been strong at the above point:

All right, this is it!

I know this is tough stuff and I am writing it, so I have documented it.

And I am not hitting on macro services here. I learned a ton from them. But for my style of trading, I need faster Quads. Therefore, I use Micro Quads I built for myself.

Going through the Backtest by myself really boosts conviction and I can always go back and see similar market situations and compare it. That helps a ton.

This stuff can be built with TC2000. I will not share everything, but I will alert here from week to week for all subscribers!

All the best and best regards.

Andreas

Disclaimer:

The information on from Andreas Himmelreich / QuantStrike and this video / blog is for information and discussion purposes only. It does not constitute a recommendation to purchase or sell any financial instruments or other products. Investment decisions should not be made with this video, and one should consider the investment objectives or financial situation of any person or institution.

Investors should obtain advice based on their own individual circumstances from their own tax, financial, legal and other advisers about the risks and merits of any transaction before making an investment decision, and only make such decisions based on the investor’s own objectives, experience, and resources.

The information from Andreas Himmelreich / QuantStrike and this video / blog is based on generally available and paid information and, although obtained from sources believed to be reliable, its accuracy and completeness cannot be assured, and such information may be incomplete or condensed. All performance results are hypothetical and the result of back testing only. Out-of-sample performance may be different. No claim is made about future performance.

Investments in financial instruments or other products carry significant risk, including the possible total loss of the principal amount invested. Andreas Himmelreich / QuantStrike and this video / Blog do not purport to identify all the risks or material considerations which may be associated with entering any transaction. Andreas Himmelreich / QuantStrike and this video / blog accepts no liability for any loss (whether direct, indirect or consequential) that may arise from any use of the information contained in or derived from Andreas Himmelreich / QuantStrike and this video / blog.