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Buying a DARWIN on a dip

Sure point one you have already made for me:

Thinking heads is more likely after a series of tails is a text book example of a Gambler Fallacy.
Sure they are not coins but we can think of them in the same way becuase we calculate an estimated future expectation. In a coin-toss we KNOW it’s 50/50 per toss but with a Darwin we have to estimate and I submit that whether or not it is a recent Darwin high or low is similar to whether or not the coins have been giving heads or tails recently. They both can produce an illusion. They are both prone to Gambler Fallacy.

Second point I’d like to make is I want to clarify the context of this discussion to be about Darwins with a more or less positive expectation that are not “manufacturing” a smooth equity curve. Darwins with enough statistical significance and that we correctly expect to be profitable. For instance I want to leave out Darwins that are too young that have a recent run up. These lucky young Darwins may be more likely than not to be losers (and here is a potential high probability of a DD immediately after a run-up) so we must leave them out.

The third point I’d like to make is lets leave out the argument about parked money is not making money. Lets assume we have a large diversified portfolio already and have found two more qualifying uncorrelated Darwins with the exact same “stats” but Darwin A has had very recent DD and Darwin B has had a very recent run up and we can pick either or both to add to our already large diversified portfolio.

The fourth point is the Darwin price. The price is not a value oriented price, it does not go up or down based on the way other traders are buying and selling it. It is a marker of sorts for calculations such as P/L. Buying a Darwin is not like a traditional “trade” as we are not trading with anyone, there is no supply or demand. (EDIT: well there is but it’s not connected or effecting price, it is capacity) Buying a Darwin is just giving a trader your money for him to trade and selling the Darwin is terminating that agreement. Darwin price at any given time prior to entering that agreement does not matter at all in this context EDIT: This does not rule out market cycle timing though!

The fifth point is about market cycles. The most arguable point:

But then how do we know how long is the cycle? Where will the current cycle end and anew one begin? Will the trader herself eventually compensate for such cycles? I think the trader herself is in a much better position to identify and adapt to (or not trade during some or develop a filter for) market cycles as a trader knows her strategies best and she can analyse the underlying market structures of a single strategy (and adapt or incorporate a filter) instead of just analyzing the equity curve of her entire strategy portfolio (within a single Darwin). Is it possible an investor can identify and exploit a weakness in a traders ability in relation to market cycles just by looking at the equity curve of the entire Darwin? I guess it’s not impossible but it seems extremely unlikely and each exploitable Darwin would have different degrees of exploit-ability and different ever changing market cycle timing. Adapting to such cycles is one of the largest challenges a trader must face, why should an investor attempt to do it isolated from the strategies and underlying markets? I’m suspicious that any testing “proving” otherwise is flawed by lack of data or is outside the context of “safe” profitable Darwins. EDIT: I can see now how some Darwins may be somewhat time-able if they are very one dimensional but…

In the context of profitable Darwins I would not expect lucky short term gains to be necessarily replicated right after a lucky streak BUT I would not expect a DD necessarily either. Instead I would expect… the calculated estimated expectation based on ALL the data!

In the context of equally profitable Darwins, any such Darwins on a recent high or low shouldn’t matter. We do expect smaller DD and risk if we are properly diversified in to more Darwins but we can ignore whether or not they are on a recent high or a low.

This seems absolutely correct to me. On a side note I would generaly try and enter when the trader is flat as in has no current open positions. That would be the only timing I can think of that is logical.

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Buying low is like value investing.
You find a quality investable darwin, good parameters, honest and educated trader, than you wait for a good price.
BTW I agree that timing is not the main point, on the long run the only important thing is that you are on something with an alpha.

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But Darwin price isn’t necessarily a representation of value. Sorry for my extra long post this 4th point I made may have got lost:

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How are you defining more favorable position? Better price?

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Would you also try to buy a hedge fund only on low price and wait for it?

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Yes exact, with darwins and hedge funds buyers don’t move the price but every strategy has ups and downs so better to enter when the result is not above average.

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Even @integracore2 seems to do this :wink:

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Funds are an interesting comparison. Some other kinds of funds are certainly trade-able. For instance if you thought a decline for oil and gas is coming you might take a long position in DRIP (the ETF not the re-investment plan) So in this case based on market timing this product is trade-able even though price does not reflect any particular “value” BUT here the goal of the ETF is different than that of a Darwin or Hedge Fund and we can analyze the exact underlying markets the ETF is trying to represent.

Hedge or Mutual Funds are more like Darwins yes but even these funds can be correlated to something theoretically time-able such as a stock index or a sector. Even here though I think we are better off analyzing the underlying markets and sectors rather than the recent equity curve of the fund in a vacuum.

If a Darwin happens to be trading one direction only in a mostly hold for a long time pattern in only one market and the underlying market and strategy are clear and the trader has no intention of trying to balance or filter or add other reverse correlated markets then it’s possible for a Darwin to be somewhat time-able too but even in this probably a rare case, I think it’s better to completely understand exactly what the traders strategy and goals are and to analyze the actual underlying markets the Darwin is trading as apposed to just looking at recent equity curve activity in a vacuum.

I think it’s fair to say the more complex a Darwin or fund is (trading multiple time frames, trading in both directions, trading multiple uncorrelated or reverse correlated markets, trading with certain filters to filter out market cycles, mixing in mean reversion with trend following etc.) The less time-able it is. I think only a moderate amount of complexity as I defined it here would make any Darwin or fund virtually un-time-able especially from just the recent P/L and especially if you add in a constantly improving trader.

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and here regretting it :wink:

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Should I buy this dip on PLF or wait for another dip? :thinking: :thinking:

I think it’s an insult to the trader because basically when you wait for a trader to have some losses before giving the trader your money to trade, you are essentially saying that you can time the traders system better than the trader can with even less information than the trader has.

Here is a barely relevant study (but still interesting) based on the obviously time-able SPX data:

I’m going to be a bit of a douche and go against my 3rd point because it’s kind of relevant if you are waiting for one single hero trader to have losses and you have no other hero: The better the trader is (excluding manufactured equity curve traders like martingales) the less frequent the DD will be and the more likely you will miss out on some good action waiting for it.

To answer I suggest buy it now but I would also say the same thing yesterday and the day before.

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Clearly when I spot martinglaes and other creative ways to produce return there is no discussion about the entry…

I already have PLF in 2 portfolios and I was waiting for the 3rd portfolio.
It is 3 months that I am waiting and with hindsight I was wrong, the same story mantioned by @FedericoSellitti

So maybe it is just psychology and the best time to enter an investment is just after you conclude it is a good one.

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Or you could stage your investment over time (Pound Cost Averaging).

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There are two logics in this question, the first is that when the price has fallen, it is more likely to rise again, but other people say that this is a prediction, and the reality is that if it is at maximums, for example, you have to buy as it is going up; the idea of buying high and selling higher.

I believe that buying only due to the fact that it has fallen is a mistake, since we do not know how much more it is going to fall, and perhaps the fall is caused by a fundamental problem that has changed the Darwin / market paradigm, and therefore will not change direction.

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Another way to explain how illogical this concept of buying Darwins on dips is:
In order for dip buying to be correct, some recent losses must mean that there is an increase to the probability of the next bets being winners. And if that is actually correct then traders would be mathematically correct to bet larger on these higher probability times. So by saying buying Darwins on dips is correct you are also saying some Martingale like strategy is the correct way to trade!

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