Academic literature is important for trading because I studied financial economics and a Master of Science at Imperial College. It’s called Risk Management and Financial Engineering. It was basically like a quantitative finance course, and I like to have very robust strategies. There are a lot of strategies in which there’s so much research, trend following, momentum, seasonal strategies, even mean reversion, contrarian strategies. The things with academic literature, if there are certain papers and they give you certain results, for instance, for seasonality, I was not a big fan of seasonality before that. I realized that there is academic research and they looked at the data from 1970 to now, and it has certain consistency. I can use this information to do my own research to build on it. I also have a benchmark, if I can replicate the results, I can be confident that there is something.
Academic research gives me a certain level of confidence. What my thoughts or my intuition is that there is actually something. If you look at research, most academics not from university, let’s say from JP Morgan, there’s a fantastic momentum trend following research paper, which was published in 2015. They did so much research on trend following momentum for futures. However, you can take these results for your stock analysis. Trend following works best with 200 days, then you can go for 180, 120 and 60. You can take these as reference points to use for your analysis and see where am I going? Is this actually a good direction? This helps me a lot with my thinking.
There are lots of strategies which maybe don’t take too much attention from academic research. Especially the long-term momentum, trend following, seasonal strategies, holiday strategies is a good start, then you’ll know where you’re going. There is something instead of, I’m having this very short-term strategies and it goes in and goes out. You need to have certain arrangements and then it works only on the yes market. Then I think, I don’t want that, I want a strategy that works very well on all different markets because then I know it’s very robust and I know the behavior I’m catching is a general behavior.
In the end, we want to catch certain behavior based on human behavior, based on psychological effects and they must be repetitive because otherwise we cannot explore them. We are not any professional high frequency traders, and we need to be aware of this. They can do a lot of more different statistical analysis because they have the money power and the computational power, but we are not. Therefore, let’s focus on something we are good at and the big guys cannot do because they’re moving so much money.