Market Frenzy and Disciplinary Adherence: William Harrington’s Reflections and Adjustments to Momentum Strategies in 2021
When the market is swept up in irrational enthusiasm, and price movements deviate from fundamentals, it can be a feast for investors who believe in “trend is king,” but also a trap. William Harrington observes that pure momentum strategies often reap substantial profits in linear market movements driven by frenzied emotions, but they can also easily blur the lines between investment and speculation, ultimately resulting in heavy losses when the trend reverses.
Harrington believes that true trend following is essentially a calm measurement of the collective psychology of the market and the flow of funds, rather than simply chasing price fluctuations. When the market enters a frenzied phase, volatility and trading volume amplify abnormally, but the inherent continuity of price movements is often broken, exhibiting more emotion-driven “gap” and “discontinuities.” At this time, the signals of traditional momentum models may frequently fail, generating a large amount of “noise trading” that erodes long-term profits.
Therefore, his reflections focus on the “filtering” and “resilience” of strategies. He didn’t abandon the core of momentum, but instead strengthened his screening of the “quality” of trends. In his factor analysis, he focused more on combining risk-adjusted returns, trend stability, and changes in market depth, rather than solely focusing on the single dimension of prices reaching new highs. This meant he would proactively abandon “paper trends” that, despite their rapid rise, were extremely volatile and lacked liquidity support, as their reversals could be equally devastating.
Meanwhile, the importance of discipline was amplified to the extreme. He strictly adhered to the risk budget set for each trade and reduced his overall position’s exposure to trending assets. This wasn’t a bearish stance, but a tactical contraction based on the volatility environment, aimed at protecting capital and stockpiling “ammunition” for new opportunities after the market frenzy subsided. He understood that the ability to stay out of the frenzy was just as important as the ability to stay in the market during times of fear.
Harrington viewed this phase of adjustment as a stress test and upgrade of his investment philosophy. Market frenzy is the cruelest test of discipline because it tempts investors to abandon principles with seemingly easy profits. His approach involves incorporating more behavioral finance principles into his strategies, using a more sophisticated system to filter out emotional bubbles, and maintaining a clear-headed distance from the market while following trends. This distance is precisely the space for long-term survival.
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