machines programmed to find a pattern within the noise of the market will always do so... even when there is no actual pattern at all.
“You can have one little pin drop that can basically make you lose over 20 years of returns
A favorite "strategy" of machine learning algos has been to buy the dip: for the past decade, BTFD has been the one risk-on strategy that worked without fail.
"Everyone’s buying the dips," Koulajian says. "There are all these people who have learned to basically suppress the vol." Of course, the reason buying the dip works is because everyone believes buying the dip works, i.e., correlation has become causation......................the relentless bull market that made such strategies work so well was driven by central bank liquidity—and that’s being pulled away now.
But the biggest test of just how "artificial" the artificial intelligence in machine learning is, will come when buying the dip - the one strategy that has so far always been profitable - no longer works. It is how the machines respond and adapt to a brave new world without correlation, or causation, backstops that will determine whether a mathematical representation of reality can ultimately outsmart reality itself.
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