Saturday, March 07, 2009

My biggest mistake

My biggest mistake: TRADING

I turned ferociously bearish on the stock market in my September 10, 2008 blog, Crash Warning.

Since then, here are the results:

S&P 500 - Fell from 1228 to 683 = 545 points = (44%)
DJIA - Fell from 11,234 to 6,627 = 4,607 points = (41%)
Nasdaq - Fell from 2,232 to 1,294 = 938 points = (42%)

Non-leveraged ETF, an average gain of 42%;
Double beta ETF, an average gain of 84%;
Index options, assume 10X leverage factor an average gain of 440%;
Conservative pyramiding of option wins, a gain of 1,332%;
E-mini futures on S&P, $5,000 margin per contract, a gain of 545%;
Conservative pyramiding of e-mini wins, a gain of 1,635%;

An average return on all of the above strategies comes to +680%.

The benchmark then, for could have, would have, should have = 680%

Yet how many of us, present company included, have even achieved a third of that return, which would be about 227% in the past six months?

Here is my mea cupla: Over-trading.

Mea culpa is a Latin phrase that translates into English as "my fault", or "my own fault". To emphasize the message, the adjective "maxima" may be inserted, resulting in "mea maxima culpa," which would translate as "my most [grievous] fault." The origin of the expression is from a traditional prayer in the Mass of the Roman Catholic Church known as Confiteor (Latin for "I confess"), in which the individual recognizes his or her flaws before God. In the popular vernacular, the expression "mea culpa" has acquired a more direct meaning, in which, by doing or performing a "mea culpa", someone admits to having made a mistake by one's own fault (meaning that it could have been avoided if that person had been more diligent). Source: Wikipedia

Is it realistic to have held short during the entire six months, enduring some painful drawdowns, albeit temporary, along the way?

Here is a link to Michael Covel's blog, he is the author of Trend Following, which I highly recommended in a previous blog. This particular post by Covel is directly on point with what I am trying to describe today, Trend Following Fund Performance Compared To Stock Indexes. It covers performance of numerous Trend Following funds against benchmarks of US and Global indexes.

Below is one example from that article. Starting in December, 1987, it compares just one trend following fund to U.S. Indexes. This period covers bull and bear alike, including the great bubble of the 1990's and all trading from the mid-2007 beginning of this devastating bear market, through December, 2008:

The math says it all: Trend Following achieved about 15X the benchmark performance of U.S. Indexes.

Covel, on page 232 of Trend Following, makes this most salient observation:

When you mechanize a system for your personal use, you take all your discretionary judgments and build them into the rules......With your trading rules established in advance and put into your system, you can avoid constant discretionary decision making.

Truer words have never been spoken. Discretionary decision making in the heat of the battle is the Anti-Christ to successful trading. You just can't catch every blip up or down, nor can your trading rules anticipate every news story, economic report or Barney Frank dribble. It is the trader with the fewest whip-saws who will win......everytime.

In the years of this blog, I have introduced my readers to many different trading models, from scalping day-trade systems (I-Buys) to swing-trading pattern recognition (Triangles from Market Club, Elliott Wave, Cycles) and now to what I consider to be the very best Trend Following System for stocks and equity indexes that I have ever seen, now trade, bar none.

Despite under-performing what we could-have, should-have, would-have done these past highly volatile six months, there is always more-to-come in the stock market. What I will introduce in coming blogs will show how cruise-control and auto-navigation can be modeled into our trading to achieve returns mirroring the trend following performance of the above chart.

Finally and as always, what the markets are likely to do short-term will remain a primary focus of future blogs, which if you haven't figured out yet, has also gone hand in hand with the basic tenants of trend following. Elliott Wave, Trade Triangles, and even Cycles all have a rightful stance in identifying trends and pointing the way ahead.

But we shall soon digress a bit, into a "none of the above" mode and take a look a something special, that very few others are doing, because herding is in our nature, but it is the outliers who lead the pack.

Get ready to lead.



Anonymous said...

Great call and hats off to you.

And newbies like me thank you for teaching us so many things that we would never have learnt /cared to learn.

Can you please explain the "trend following" system and where is it available?

Also, what do you think about Friday's market action. Recovering in the last 30 minutes. Will it translate into a higher open on Monday ?

And do you trade ES and the like ?

Speedy Conzales said...

Nice job Allan. I am reading Your every post with great interest.
I can seen many covering on Friday, as market is oversold. I am not sure, if the ones selling, actually follow technical pictures. Same happened in October and also in January.
What's Your take for next week? I think the small rally ending friday is more like a regular pattern - market getting a breath. I've seen this many times before over the last couple of months. Should be no surprise, if the selling pressure resumes.

Keep it up. thanks

MakeMoreMoney! said...

I visited Michael's website.

He is offering a course for for 1300.

I have not been successful so far in my efforts to make some money in the market and am desperate to get ir right.

Is this something that you would recommend ?


Allan said...

MMM: For $13.59 you can buy his book at Amazon, which would a great introduction to trend following. I don't know anything about his course, so, no comment.

Allan said...

Re: Markets

The Red Wings are losing to Columbus 8-3 right now. Armageddon is at hand.

Iluha said...

Dont spend money on courses....just keep reading and educate yourself.

I have found out that even in my professional, people that teach dont really know the real tricks!

Anonymous said...


You had a great call.

The stock market and bond market were in two massive multi-decade trends so buy and hold made sense.

Few markets uncork huge trends like that. Even then, the market rarely goes straight up or down, and with all this leverage in today's investment vehicles, on average, the buy and hold or sell and hold strategy will lead to ruin most of the time.

As a result, you have to trade in and out to insure you will survive to trade again tomorrow.

Before profits, that is the #1 goal -- having enough capital to trade again tomorrow.

Unfortunately, the shorter the holding period, the less the trend and cycle component in the price data and the higher the noise component.

Longer-term trading gives you a higher trend and cycle component, but more risk because you are in the market so long.

Short-term holding periods gives you a lower trend component to ride in the price data, but their is less risk of ruin.

I fully understood that, but never quite figured that out where the best place was to be on on the holding period spectrium. Once I got married and had kids, I didn't have the time to get to the bottom of that.


Anonymous said...

One other point. If you are going to just hunt for long-term trends, it sounds great on paper, but be prepared to be wrong 60% of the time or more.

Basically, you probe and probe for a long-term trend, and once you get one, you hold on to it.

Most don't have the psychological strength to follow a trading system that is wrong 65% of the time.

Test the 20 day moving average. I'm sure it made money in stocks the past few years, but I doubt it was right more than 40% to 45% of the time.


Anonymous said...

NNVC down to 61 cents, please get back up or else I will feed you Viagra