Momentum versus mean reversion traders - they co-exist

I have embraced momentum trading, yet I also appreciate the complexity of markets. The foundations for why markets trend is strong. I also believe that trends will eventual end and there will be a reversion to the mean. No trend lasts forever. The reversal has to be the case otherwise we would not have a problem of stationary prices. Every trend ends. It is just a matter of understanding when the party is over. If that is the case, trend-followers and trend reversers can co-exist.

All markets go through cycles. There are business cycles, risk premium cycles, credit cycles, capital flows and sentiment cycles. Markets do not trend in one direction, so long and short positions are always being revised. However, prices can trend for periods long enough and in recurring patterns to be exploited through active trading. Similarly, those trends will reverse so a mean reversal specialist should be able to also make money

The success of active trend trading is based on the ability to appreciate the power of exiting markets and well as entering. Some call this risk management, but there is actually more to this process. Exiting trades is loss avoidance which is different than risk management or the focus on loss diversification and control. The same can also apply to those who fade trends.

I finished a recent article on momentum versus mean reversion by a very good statistician and market analyst, Salil Mehta. His analysis should be taken seriously What he shows is that money can be made from the same price series through trend identification as well as mean reversion. Trend-following focuses on buying past winners. Mean reversion focuses on selling past winners. The difference is is identifying when to do it and determining for how long.

So which is better? This complexity is why managers have to think deeply about how prices behave. Trend following focuses on divergent trading away from an equilibrium price. Mean reversion focuses convergence back to an equilibrium price. Do you want to be a divergent or convergent trader? There are two paths and each manager has to determine which style is consistent with their mental risk tolerance.