Trading the Fragmented World of 2026 | Systematic Investor | Ep.382

Episode Overview

• Explores the fundamental macroeconomic shift from globalization to regionalization and why this creates "sticky" market imbalances that favor trend-following strategies.
• Introduces the "Formula One" analogy to dismantle the practice of trading based on historical averages, advocating instead for "situational response" to volatility.
• Challenges the philosophical basis of forecasting by distinguishing between a "hidden future" (which invites prediction) and an "unfinished future" (which demands adaptation).
• Examines the psychological trade-offs of trading, specifically how optimization and profit-taking are often emotional crutches that sacrifice long-term mathematical convexity for short-term comfort.

Key Concepts

• From Globalization to Regionalization: The global economy is moving away from integration (where central banks and open trade smoothed out shocks) toward fragmentation. In this new "regionalized" era, imbalances—like inflation or supply shortages—lack a central "release valve." This transforms short-term shocks into long-term conditions, creating trends that have more room to run because no authority exists to correct them quickly.

• The Fallacy of Average Speed (The Racing Analogy): Trading based on backtested averages (e.g., average position size, average volatility) is dangerous. It is akin to a race car driver trying to drive a track at the "average speed" of 120mph. In reality, a driver must brake hard for corners (volatility/risk) and accelerate fully on straights (trends). Traders must abandon static sizing for dynamic "brakes" and "accelerators."

• The "Unfinished" Future vs. Prediction: Most analysis assumes the future is "hidden" behind fog, leading traders to seek better predictive tools. The speakers argue the future is actually "unfinished"—it is being constructed moment-by-moment. If the future does not yet exist, prediction is impossible. The only viable strategy is to observe the structure currently emerging (trend following) rather than forecasting what comes next.

• Optimization as an Emotional Shield: Traders often over-optimize their systems to smooth out drawdowns and equity curves. While this feels responsible, it is often an emotional coping mechanism to avoid uncertainty. By "smoothing the ride" (e.g., taking profits early to relieve the pressure of a large open position), traders remove the positive asymmetry (convexity) required to generate significant wealth.

• Conditions create Trends: A critical distinction is made between "shocks" (short-term events) and "conditions" (structural realities). In the current geopolitical environment, issues like energy shortages are not momentary blips; they are conditions that persist. Trend following strategies thrive not on predicting events, but on capturing the adjustment phase as markets slowly re-price these persistent conditions.

Quotes

• At 0:07:27 - "In a regionalized world, however, these release valves, they work much more slowly or not at all... Energy shortages stay regional for longer. Inflation differs by country... These are not one-day shocks, they are conditions. And conditions create trends." - Explaining why the current geopolitical environment creates structural opportunities for trend followers.

• At 0:08:01 - "Markets don't move because someone predicts the future correctly. They move because something becomes out of balance and stays that way long enough for prices to adjust." - Defining the fundamental economic mechanic that drives trend following.

• At 0:08:18 - "Crucially, there's no single authority or coordinated central bank intervention now available to step in and resolve them quickly. And when something starts moving in this regionalized environment, it's got room to run." - Highlighting how the lack of global policy coordination removes the "ceiling" on many market trends.

• At 0:29:46 - "A Formula One race is not won by driving at the average speed of the track... No driver tries to maintain the average lap speed at all times. They slow aggressively into corners, and they accelerate fully on straights." - The core metaphor for "trading the now" rather than trading historical averages.

• At 0:31:03 - "A backtest gives you the entire track... That sense of completion is deeply comforting. It quietly suggests that 'correct speed' exists, and that with enough refinement, we can discover it." - Explaining the false sense of certainty provided by historical simulations.

• At 0:33:30 - "Average exposure replaces what I call 'situational response.' And what feels conservative is actually careless." - Explaining that relying on average historical volatility seems safe but is dangerous because it ignores the specific risks of the present moment.

• At 0:33:58 - "Brakes are not predictions. They're commitments. They exist before the corners appear... A stop loss is a brake. Position limits are brakes. Drawdown rules are brakes." - Defining risk management as pre-determined rules rather than reactive decisions.

• At 0:41:43 - "The future is not hidden, it is unfinished... It does not yet exist as a complete object." - The core philosophical shift required to move from forecasting to responsive trading.

• At 0:43:19 - "Prediction assumes its object—the future—exists... You're trying to see something that does not yet exist." - Why fundamental analysis and forecasting often fail in complex, reflexive market systems.

• At 0:48:40 - "The trend is not a forecast. It's a recognition of structure that currently exists... We align with emergence rather than trying to anticipate it." - The definition of trend following as a participatory strategy rather than a predictive one.

• At 0:58:25 - "Convexity is not lost through error, it is surrendered to restore comfort." - A critical insight into why traders cut winning trades early—not because the market structure changed, but because the profit felt "too large" or uncomfortable.

Takeaways

• Shift from Prediction to Response: Stop trying to find "better binoculars" to see a hidden future. Acknowledge the future is unfinished. Focus your energy on defining strict rules for how you will respond to what is happening right now, rather than guessing what happens next.

• Apply "Situational Response" over Average Sizing: Do not size your positions based on 10-year historical averages. Develop a system of "brakes" (aggressive risk reduction during volatility) and "accelerators" (maximum exposure during smooth trends) to adapt to current road conditions.

• Pre-set Your "Brakes": Establish your risk management commitments before you enter the trade. Stop losses, position limits, and drawdown rules must be non-negotiable commitments made in a cold state, not decisions made in the heat of a volatile moment.

• Resist the Urge to "Lift": Do not reduce exposure on winning trades simply because the profit size feels uncomfortable or "abnormal." Recognizing that "lifting" to restore emotional comfort destroys the mathematical edge (convexity) of your strategy is essential for long-term performance.

• Seek Robustness, Not Precision: Avoid over-optimizing your trading parameters (e.g., finding the "perfect" moving average length). Precise systems are fragile because they rely on the future looking exactly like the past. "Loose" systems that work across many conditions are more robust.

• Lengthen Your Time Horizon: In a fragmented, noisy world, short-term signals are easily whipsawed. Shift toward longer lookback periods (60+ days) to filter out noise and capture the structural macro-trends driven by sticky economic conditions.