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Investment Strategy Overview

From a technical perspective, price action can be construed as the interaction of two conflicting forces: mean reversion (the tendency for large price movements to be reversed to the “mean”) and momentum (the tendency of large price movements to lead to reinforce themselves and keep progressing in the same direction).

Although for most names in most liquid markets these forces tend to be in balance, there are a myriad of factors (e.g., news, events, etc.) that generate price variations, especially for specific names, that offer profitable trading and/or investment opportunities. We focus on these situations and conscientiously ignore the environments, which generally occur, in which market forces are in balance and price movement is nearly random.

It is important to mention that the investment strategy not only includes the identification of profitable trading opportunities, but also a very robust, consistent and discipline money management process. In other words, losing positions are held to pre-established stop loss levels, position sizing is controlled in the context of total capital and cash accrued returns and names and situations that could be susceptible to intraday ‘surprises’ are excluded from the firm investment domain.

Below we answer some questions posed to us by some clients.

Does your primary focus are technical situations and patterns that you can recurently identify and which show mean reversion or momentum prior to it materializing over a certain timeframe?

That is correct. One way to view our strategy is precisely our consistent capacity to identify these situations our research and deep knowledge of the markets, including the internal market structure. As mentioned, at the core of our investment/trading strategy it is what is known as technical analysis (as opposed to fundamental analysis).

Can you identify specific patterns that show when you should “go with” a strong price movement or when you should “fade” such a price movement?

Yes. It has to do with certain technical patterns coupled with what is known as (overall) internal market structure, which is currently dominated by algorithmic and program trading as well as high frequency trading. Thorough knowledge and understanding of these two factors provides us with the capacity to consistently identify such trading opportunities.

It also allows to identify the commonly occurring situation in which there is an absence of such patterns (i.e., where the market action is following a “random” path) and in which we do not have any comparative advantage or opportunity to consistently make a profit. Our investment strategy simply disregard and abstain from trading in this situation.

Does market direction has an impact in your results?

Our strategy does not need a directional market to be profitable. We take long as well as short positions depending on technicals, market environment and other catalysts, therefore market direction is not a loss determinant. In fact, a more volatile market, irrespective of direction, benefits us.

INTRADAY MEAN REVERSION

Fading large single bars (within overall “exponential” price movements)
Fading N-day runs (after established resistance/support)
Fading breakouts of N-day highs or lows (after key level fails)
Fading large divergences from average prices (Keltner channels or Bollinger Bands)

INTRADAY MOMENTUM

Pullbacks (to support or resistance)
Nested pullbacks (to key levels)
Breakouts, in some cases where there is consonance of several key factors
Volatility compression (coupled with catalysts)