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A Volatile Return Series is a Necessary Evil for those seeking Alpha through Momentum Models

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 Alex Bee, Investment assets manager. ”Cut short your losses, Let your profits run on.” David Ricardo (1772 - 1823)

 Monday, February 19, 2018

For traders seeking a ticket to riches, the search for Alpha (outperformance over the market) is the main game…..otherwise just plonk your dough into an ETF that mimics a market index and save yourself the hassle. So what is alpha and how do we find it? In general terms, alpha is an exploitable opportunity that exists from an informational advantage or repeatable behaviour that is not enjoyed by the general market participant. In essence you are looking for those exploitable ephemeral anomalies that may or may not exist in an otherwise efficient market that is characterised by Brownian Motion (or simple random price movement). These opportunities may exist for a fleeting moment, such as a once-off opportunity from a unique informational advantage, or a more durable opportunity arising from the possession of a particular technology, informational advantage or repeatable behaviour. Alpha of more long term duration may be of a sporadic and unpredictable nature (eg. relying on a particular participant behaviour during extreme events), or be a more permanent and predictable opportunity over a period of time (such as a new technology, or informational insight). The bottom line is that when you combine these sporadic and more durable moments of alpha, you frequently find that these opportunities occur in clusters over a time series with long periods of random walk in between. This makes the game of finding alpha an elusive one. More here: https://www.raftradingsolutions.com/a-volatile-return-series-is-a-necessary-evil-for-those-seeking-alpha-through-momentum-models/


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