Q&A by Rob Friesen
STAYING WITH YOUR PLAN
Last month, we examined the concept of style drift and the different ways it can cause a trader to deviate from his originally stated strategies, rules he wanted to follow, and overall trading plans. This month, I’ll look at the tendency of traders to spontaneously deviate from their strategies to chase returns based on temporary market conditions. Traders believe the market behavior to be the “new norm” and see it through the lens of permanency.
I’ll call this phenomenon “chasing cupcakes” based on a retail trend that has been seen multiple times in the retail food industry. This trend was first observed in the 1990s with the number of frozen yogurt shops that seemed to pop up overnight. In the past few years, this cycle came around again with cupcake shops, that is, shops that are dedicated to selling only cupcakes...