How to Avoid the Next Crash

All systematic trading strategies rely on some characteristics of the markets, some statistical anomalies, some patterns, some interrelations. And then there are some situations when all these characteristics no longer exists, all interrelations break down – there is nothing but chaos, we call it a crash.
A systematic trading system is bound to lose some money in such a situation. All the rules it can handle do no longer apply.
Therefore it is very interesting and helpful to recognize these situations as fast as possible and leave the markets until the storm is over.
We developed such a “Crash Detector” for our trading systems.
The inner workings can be summarized with a single sentence: “Is there an unusual number of stocks with unusual movements?” Add some distribution free statistics and you’re done.
We don’t know what the future brings but with this new technology chances are that we suffer less from the next major crash.