Well, in practice I think they most often are just using fundamental analysis. I could be wrong, but I don't often hear of M&A arb players doing things like only buying as the spread contracts and shorting it if it begins to tighten. If anything, a pure arb player would to the reverse, eg see any unwinding as a "buy the dips" opportunity to get in at even better prices. They very well may unwind their positions, but for fundamental, not technical, reasons. Ie maybe the government says they won't approve the deal any more. In this case they will unwind their position as it no longer makes fundamental sense. I'm talking just about arb trading in its pure form. This isn't to say some people don't use a combination of "arb" and "trend following", nor am I saying trend following doesn't work (nor that it does work lol though I believe it does in some cases). I'm just saying that doing arb trading in its pure form is very different than trend following. -Taric
great post. thanks....i agree with you. however, the little leaguers trend definition based on "index arb" was bizzare to to say the least--- cause and effect is not a defintion.
there are many funds that trade without a trend. in fact the number one fund over the last three years over 100 million is managed by a non "trend believer". the traders you mention as super succesful trend followers are merely the outliers in the distribution curve--- many ( perhaps thousands) have failed trying to trade the trend.
NickelScalper, just to get some clarity because I see a lot of people getting hung up about d. Is it correct that you are not asking for the value d, but for a method of predicting future price action such that a profitable trade can be taken (where d is minimum price move that is "worth" trading)? I would imagine that d depends on the spread of the vehicle being traded and the round-trip commision cost. Is that correct or are you asking for the value d as part of this challenge?
Nickel: I already pointed out this is done by a mechanical trader using backtested results in the form of average trade. You want an exact expected result per signal; this is not how trend following works. You take the signal under the expectation that, on average after commissions and slippage, you're going to net x dollars. This is "d". It is constant through time, and once the system is not delivering "d" (determined through simple statistics) you reassess it or can it. Also, I did some research on your past. It seems you're a failed "daytrading trend follower": http://www.elitetrader.com/vb/showthread.php?s=&threadid=43533&perpage=6&pagenumber=4 You scalp the QQQ, but why would you do that when you can scalp the NQ for MUCH cheaper costs? And why would a scalper be paying for trading signals? I think you're simply a struggling trader. There is nothing wrong with this, but I also don't think your position allows you to be so critical of one's personal approach to trading if you yourself are still new and struggling. You've recieved answers that follow your specifications several times, but you dismiss them by slightly changing the rules each time. Your rules are in opposition to the whole method of trend following. A trend system that relies on profit targets exclusively is usually not as effective as one that doesn't (this doens't mean they shouldn't be used; they are good for scaling out and whle leaving a portion to run for the trend duration). You are essentially looking for a system where the exit is only on the stop or target, and at no point in between. That is ineffective trend following (in the majority of the cases; exceptions do exist I'm sure).