Chapter 19 · Where strategies come from
Whose money funds a strategy that can profit over the long term?
- Skills to practice
- Research Edge
- 3D simulation
- None
Market scene
Lin collects a page of buying slogans: follow fast rises, buy large falls, chase news. Each has a profitable screenshot, but none explains why the other side would leave him an opportunity.
Zhe removes the screenshots and leaves three questions: who must trade, what constraint makes them act, and when does that constraint disappear? The same rising price may reflect persistent buying or a book temporarily lacking sellers.
Without identifying who pays, how can you judge repeatability?
Your decision
Choose a return source to research and explain who bears its corresponding cost.
Observe the result
| Starting point | What you get | What you do not get |
|---|---|---|
| Profit screenshot | A phenomenon | Full distribution and mechanism |
| Counterparty needs | Testable causal clues | Guaranteed return |
| New indicator name | A label | An independent return source |
| Adverse-outcome list | Risk constraints | Probability evidence |
Strategies with different names may earn the same kind of money and fear the same events.
The mechanism
Start from participant constraints and trace how they create orders and affect fill prices. Then seek evidence for that chain. These eight research entries include data/product dimensions under “on-chain” and “derivatives”; they are not necessarily independent.
- Who has a need or constraint
- Why they accept a cost
- Which orders result
- How prices or cash flows change
- Which data can observe it
- Under what condition it disappears
| Research entry | Possible payment mechanism | Observable evidence | Invalidation to consider |
|---|---|---|---|
| Momentum | Position adjustments or information diffusion take time | Persistent returns/trades/flows | Exhausted demand and crowded reversal |
| Mean reversion | Temporary imbalance ends; quotes converge | Deviations, restored depth, replenishment | Original price anchor changes |
| Carry | Holders or borrowers pay costs | Funding, basis, financing terms | Rate reversal, borrowing/exit failure |
| Relative value | Related assets temporarily misprice | Spreads and hedgeable relations | Relationship break, asynchronous exits |
| Flow | Passive subscriptions/redemptions or large reallocations create orders | Publication-timed flows | Information priced in; flows not actual trades |
| Derivatives | Hedging, adjustments, or forced exits | OI, funding, liquidation records | Definition changes or reversed feedback |
| On-chain | Transfers and holder constraints change supply | Block/confirmation time, address ownership | Wrong labels; transfers not trades |
| Event | Rules or supply/demand change at a time | Announcements/calendars/visibility | Expected events, changed content, crowded execution |
These are mechanisms to test, not eight guaranteed methods. Quote repair may compensate a service or conceal unrecognized tails.
What it is called
Real markets
Chapter 4 contrasts follow-on fuel with waiting sellers. A rise does not imply unlimited buying capital.
Arbitrage in Chapter 16 brings prices together. Record capital tied up on both sides and execution costs when researching its returns.
Chapter 17 separates funding from direction. Funding receipts alone are not total results; hedging and financing belong in the mechanism.
Hands-on
- Choose three different sources from the eight entries and write one observable phenomenon each.
- Draw participants, constraints, orders, and prices, marking unknown links.
- Define a condition breaking each chain. No account inspection or orders are needed.
- Bring drafts to the Chapter 20 workshop and produce a copyable hypothesis report.
Change one variable
Three depths
- FoundationWhose money funds a sustainably profitable strategy?Chapter 19
- AdvancedWhose money funds each of eight strategy classes, and when does each fail?Advanced B · Strategy research
- InstitutionalWhich return sources should a portfolio cover to avoid simultaneous failure?Institutional
Write who pays and why before finding indicators. Unexplained phenomena may remain research questions rather than immediate trades.
Use consistent mechanism, timing, cost, and invalidation tables for eight strategy categories. Separate return sources from data sources; see Advanced B.
Continue the project: complete counterevidence cards for eight return mechanisms.
Group portfolios by shared drivers and tails. Different names relying on identical financing or flows still need combined budget checks.
Continue the project: identify shared risks across five strategy categories.
Questions to take away
Chapter self-test
No. They mix mechanisms, products, and data and may share order flow and exposures.
An unexplained phenomenon, not a complete distribution or economic mechanism.
No. Include direction, financing, fills, and exits.
If both rely on the same continuing buys, those buys ending breaks both chains.
One idea to take away
Every strategy has a return source: others' behavioral biases, market structure, compensation for risk, or price discrepancies.
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Whose money funds a sustainably profitable strategy?
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