<story><title>Statistical Arbitrage – An Easy Walkthrough</title><url>https://dm13450.github.io/2023/07/15/Stat-Arb-Walkthrough.html</url></story><parent_chain><item><author>mg</author><text>The unintuitive thing about the stock market is that you are not trying to predict a system unrelated to yourself. But you are trying to predict other people&amp;#x27;s behavior. People who are just like you.&lt;p&gt;So when you notice a pattern - say &amp;quot;Stock S trades lower on Tuesdays and higher on Fridays&amp;quot;, what do you do?&lt;p&gt;Do you buy on Tuesday to exploit the pattern?&lt;p&gt;Or do you buy on Friday because you are not a unique snowflake and others will notice the same historical pattern and therefore reverse it in the future?&lt;p&gt;There is no way to decide. Because even if you see long-running patterns in the history of the stock market, those patterns might have reverted just at that moment when people like you noticed them.&lt;p&gt;This holds for all patterns. Even if they are as complex as the ones described in the article.</text></item></parent_chain><comment><author>TeMPOraL</author><text>&amp;gt; &lt;i&gt;Or do you buy on Friday because you are not a unique snowflake and others will notice the same historical pattern and therefore reverse it in the future?&lt;/i&gt;&lt;p&gt;Well, as you said, you&amp;#x27;re not a unique snowflake. Many people will make that extra thinking step too.&lt;p&gt;You can try and make another step, try to account for people aiming for the trend reversal. But you&amp;#x27;re not a unique snowflake - some people will think about it too, and account for those people the same way.&lt;p&gt;If this starts to look like infinite series, it is, and it converges to something, and I suppose there are some mathematical truths to be said about it. But the practical truth is, any pattern that becomes noticed will not end up &lt;i&gt;reversed&lt;/i&gt;. It will be &lt;i&gt;driven back down to random noise&lt;/i&gt;. This is the anti-inductive nature of phenomena like stock markets: once a pattern becomes known, it disappears.</text></comment>
<story><title>Statistical Arbitrage – An Easy Walkthrough</title><url>https://dm13450.github.io/2023/07/15/Stat-Arb-Walkthrough.html</url></story><parent_chain><item><author>mg</author><text>The unintuitive thing about the stock market is that you are not trying to predict a system unrelated to yourself. But you are trying to predict other people&amp;#x27;s behavior. People who are just like you.&lt;p&gt;So when you notice a pattern - say &amp;quot;Stock S trades lower on Tuesdays and higher on Fridays&amp;quot;, what do you do?&lt;p&gt;Do you buy on Tuesday to exploit the pattern?&lt;p&gt;Or do you buy on Friday because you are not a unique snowflake and others will notice the same historical pattern and therefore reverse it in the future?&lt;p&gt;There is no way to decide. Because even if you see long-running patterns in the history of the stock market, those patterns might have reverted just at that moment when people like you noticed them.&lt;p&gt;This holds for all patterns. Even if they are as complex as the ones described in the article.</text></item></parent_chain><comment><author>pharmakom</author><text>My favourite explanation is a contest to guess how many jelly beans are in the jar.&lt;p&gt;How can you win?&lt;p&gt;- Get lucky&lt;p&gt;- Have a data advantage (maybe you can measure the dimensions of the jar accurately from afar&lt;p&gt;- Have a modelling advantage (maybe you have a 3D model of a jar in a computer simulation)</text></comment>