Mythic Pyramid Introduction

Foundation Series

Thank you for taking the time to listen to Capital Flows and myself yesterday! It was so much fun, and we are looking forward to doing more Twitter Spaces. Feedback is always helpful, so please share your questions or comments.

Something I wanted to discuss is the Mythic Pyramid. This is the mental model we use to categorize our trading strategies. The point is simple, we want to build a strategy to meet specific objectives. Therefore we have developed three categories:

1. Wand

2. Sword

3. Shield

First, I was talking about centaurs, and now I'm comparing our portfolio to a wizard. Don't worry; I'm not losing my mind. There's a lot to gather from my choice of words. so take a moment and think.

When building a portfolio, diversification is the first topic of conversation. If you haven't seen Ray Dalio's Holy Grail video take the time to watch it! Some categories that provide diversification are:

1. Asset Class

   1. Stocks

   2. Bonds

   3. Real Estate

   4. Commodities

   5. Crypto

2. Trade Direction

   1. Long

   2. Short

3. Return Driver

   1. Trend/Momentum

   2. Value

   3. Mean Reversion

   4. Volatility

4. Time Horizon

   1. Years

   2. Months

   3. Weeks

   4. Days

   5. Intraday

   6. Milliseconds

Here at Mythic Market, we categorize our trading strategies by time horizon. This has to do with portfolio turnover and compounding math. Let me show you what I mean:

1. System 1:

   1. 100 trades per year

   2. .3% Expectancy

      

1. System 2

   1. 1000 trades per year

   2. .3% Expectancy

      

Our results were 14x by increasing our trade count by 10x. Compounding is magical. Proving that if you have an edge, you want to play that game as many times as possible. Therefore, we know our higher turnover strategies can produce higher returns per unit of risk than our lower turnover strategies. That's why we group our strategies based on the time horizon.

Now in markets, it's tough to find an edge, and there are limits to increasing portfolio turnover:

1. Buying Power

2. Liquidity

3. Transaction costs

4. Execution Mistakes

So we developed the Mythic Pyramid to categorize our edges, and I'll explain the categories here:

1. Wand: Our short-term strategies. Lasting from hours to 3 days. The objective is to deliver high-octane results systematically.

2. Sword: Our medium-term strategies. Lasting from Weeks to Months. The objective is to capture major market moves each year.

3. Shield: Our Long-Term Strategies. Lasting Months to Years. The objective is to preserve purchasing power through low turnover and low drawdown strategies.

See how we match our return expectations and idea time horizon with the trades' time horizon! Paul Tudor Jones said, "Your trade's time horizon has to match your idea's time horizon." If you can master aligning your trade idea and the idea's time horizon, your results will drastically improve. The best exit type we have tested is the time stop. This speaks to the need to know how long your signal produces alpha!

Therefore, everything we do at MMR is about matching our signal with our time horizon! We then group strategies together with similar time horizons and work to diversify amongst the other factors.

Thanks for reading! Please, like or leave a comment.