Sunday, July 05, 2009

The trading phenomenon

Here are a couple of ways to trade Gold. First, a methodology that most of us are well versed in, reading about Gold and being mislead by the most persuasive arguments:


From Seeking Alpha:




Here is another way:


In the past nine months, DGP (double beta ETF for Gold) has risen from $15.28 to $19.74, a gain of about 30%. This represents a Buy & Hold return, with the leverage inherent in the double beta construction of this instrument.

Or, DGP can be traded with a rule-based trend following system. The system represented in the chart below traded DGP long and short during the same time period, September 2008 to July 2009. There were 12 trades, 10 winners and 2 losers. The total cumulative gain was $25.82, or about 170%. The average trade gained about 13%.



This is a Daily chart, more trades and a greater cumulative total can be seen in intraday time frames, but for comparison sake, I want to compare Daily returns.

We are talking about a system that trades about twice a month and yields about 5-6X the return of Buy and Hold.

By now you should recognize the 3-line point break chart, embedded with the Blue Wave Trend Model, Precision CCI and Precision Moving Average.

If you click on the Seeking Alpha link, you will find 47 articles written about Gold during the time frame charted above. That's one site. Multiply that by 100 other sites writing about Gold. Ask yourself, how in the hell are you going to figure all that out and have any expectation of getting Gold's investment story right?

This is the trading phenomenon. It is about taking calculated risks. The results shown for DGP can be and in fact has been shown here to be similar for equity and bond markets as well as individual securities.

Technical analysis in general and rule-based trend following in particular concerns itself only with price movement. There are reasons behind all price movements, but they don't play any role in the way I trade. As you know, I have forecast a rough period for equity prices in the second half of 2009. Even that forecast doesn't materially effect the way I trade. It took me 20 years to figure this out. I hope somehow your collective learning curves are reduced by my sharing of my techniques. It's not to say my way is the only way, but it is to say that technical analysis, rule-based trading systems and trend following are the only way. The sooner that is learned, the sooner success will be found.

Sorry for the rant and lecture. Maybe you'll thank me some day.

Or just remember me and the day it all changed for you.


A

8 comments:

Anonymous said...

Allan,

Neely said today on his web site, in the Question of the Day section, that his techniques are highly unreliable for intraday trading, especially without the concurrence of multiple time frames. Do you believe Neely gave up on intraday trading too early, and would have benefitted from reading Covel and experimenting with different rules based systems? Is wave theory markedly less reliable on smaller scales of time or is it all fractals like Prechter believes?

Smiddywesson

PS: Neely Q&A reproduced below

"Question:
Why do you not release intra-day, real-time analysis ? Isn't that important considering the fractal nature of wave theory?

Answer:
Hidden within your statement is the assumption markets can accurately be labeled and predicted on every time frame at all times. Unfortunately, that simply is not the case.

Markets move from periods of structural clarity to structural ambiguity or confusion. When a market is near the beginning or end of multiple larger and smaller degree patterns, clarity will be high along with forecasting accuracy. As a market moves further away from the beginning or end of multiple degree formations, clarity drops and forecasting is sometimes impossible. If it is attempted, those forecasts will frequently be wrong. It is at such times the reputation of wave theory is damaged (both from the eyes of the practitioner and the public). There is NO answer to this problem; it simply is a reality of markets and must be accepted.

For the reasons mentioned above, it is seldom of value to my customers to attempt intra-day wave analysis, especially when Daily or Weekly wave counts are not clear. The only time honing in on intra-day structure is of value is when all larger degree patterns (Daily, Weekly, Monthly) are near the end of their development. When near the middle of a complex Weekly or Monthly structure, it is even a waste of time to follow Daily charts."

Allan said...

Do you believe Neely gave up on intraday trading too early, and would have benefitted from reading Covel and experimenting with different rules based systems?

Neely's brilliance is in his ability to call major changes in trend, "big picture" analysis, using his NEoWave analysis. It's not a matter of giving up on short term analysis, instead, it is something that his theory does not apply to with nearly the same kind of accuracy.

Is wave theory markedly less reliable on smaller scales of time or is it all fractals like Prechter believes?

Wave theory covers a lot of ground, Prechter uses it on the smallest time frames, Neely's approach doesn't even attempt to go there. The biggest reason being that Prechter's wave theory and Neely's wave theory differ widely in application and analysis. Neely understands and admits the inherent limitations of NEoWave. Prechter thrives on the universal application of his Elliott Wave Principle.

As far as I see it, both approaches have strengths and are complimentary, but both are about as far from trend following as is possible, with one glaring exception, one facet that all of the above have in common: Pattern Recognition.

Lots to think about, but now its time to trade.

Anonymous said...

Allan, did you notice that a mechanical trading system is at the heart of this?

http://blogs.reuters.com/commentaries/2009/07/05/a-goldman-trading-scandal/

- Cramar

abot said...

Allan wrote: "Sorry for the rant and lecture. Maybe you'll thank me some day."

Thanks Allan!

Anonymous said...

No appologies please. Sometimes when people ask dumb questions it's because they are being dumb. Other times it's because they WANT to elicit a rant so they can learn something useful. I am learning.

Thanks, and keep it coming.

Smiddywesson

PS: Anyone interested in a library full of useless fundamental investing books?

Anonymous said...

ETN's have a risk level that has made me an ETF only guy.
Goldfungus

Michael Lomker said...

>markedly less reliable on smaller scales of time

I frequently trade ABC patterns intraday. There was one that formed for most of the day today. Once you know what the patterns look like you don't need fancy software to see them--it's as clear as day on a 5min chart.

Wave C = A or wave C = 1.6182 x A. In today's case both 891 and 894.50 (on ES) provided good exits.

Tyler said...

I'll thank you right away Allan!

It took me less years to come to the same conclusion, but axtually a lot of work is in front of me, so I'm looking forward to your fine commentary to sharpen my skills. Too bad I discovered this blog only few days ago, but thanks God for the archives. :)

Keep up the good work!