tag:blogger.com,1999:blog-26012405.post8949316891537903631..comments2024-03-10T12:27:40.157+00:00Comments on the trend follower: An argument against market direction determining your biasUnknownnoreply@blogger.comBlogger6125tag:blogger.com,1999:blog-26012405.post-32994987459510783022015-01-31T17:26:34.555+00:002015-01-31T17:26:34.555+00:00Thanks for all the comments guys. Obviously struck...Thanks for all the comments guys. Obviously struck a chord with a few people as I normally don't get this many comments on a single post!Trader Stevehttps://www.blogger.com/profile/07875469634283453010noreply@blogger.comtag:blogger.com,1999:blog-26012405.post-12334459088316626312015-01-30T17:47:01.758+00:002015-01-30T17:47:01.758+00:00I think the strongest argument in favour of ignori...I think the strongest argument in favour of ignoring the indices is what you say about shares trending over the last few months despite no clear trend in the FTSE. And if anyone knows how to identify these trading opportunities, please let me know. But in my experience, a share may well break out from the 20 day high in unison with the index but if the index reverses, so does the share price. Not sure if this is because I trade predominantly smaller cap shares which may not carry as much momentum when they break out?Keithhttp://keithmcg.comnoreply@blogger.comtag:blogger.com,1999:blog-26012405.post-76597532258694280722015-01-30T17:10:27.464+00:002015-01-30T17:10:27.464+00:00I agree with Steve. This is a fat tail system with...I agree with Steve. This is a fat tail system with a skew on the right i.e. 95% of profits come from 5% of the trades. Those 5% trades will tend to shoot up and do what they want, and act strong as they have their own story. Therefore if you dont take a strong acting signal as the overall index is lagging, you might miss all your years profits. (cherry picked) example would be 2008 - family dollar store vs the S&P500. a lagging index is likely to cause more breakout failures and for example a weak breakout in a up market might lead to 0.5R gain where as 0.5 loss in weak market. whilst they would add up and impact performance/win rate, the point is that 5%/95% effect.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-26012405.post-87458842835373930662015-01-30T15:41:17.221+00:002015-01-30T15:41:17.221+00:00Agreed. Good post.
What we really have is a ‘mar...Agreed. Good post. <br /><br />What we really have is a ‘market of individual stocks', not a stock market. At any given time you can find trending stocks, regardless of where the broader market averages are. <br /><br />You may also notice the longer term breakouts tend to lead the averages. Many shorter term traders seem to use the broader market action to filter out some of the noise. But I think that's a complicated way to trade. The longer term trend discounts all one needs to know and for me that trust came with time and experience. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-26012405.post-19953898563866033452015-01-30T10:26:08.681+00:002015-01-30T10:26:08.681+00:00Hi Steve.
I agree. Such a narrow index as the DOW ...Hi Steve.<br />I agree. Such a narrow index as the DOW is meaningless. Also, the cap weighting in narrow indexes (FTSE100, CAC40, DAX30, S&P500 yes even S&P) distorts the "average joe" stock which historically and statistically mostly tends to go down on the long run. The indexes being very crude trend following instruments (dump worst loosers, keep winners) have an ingrained survivalship biais, which dont make the task simpler. This study from the CAS Business School (http://www.cass.city.ac.uk/__data/assets/pdf_file/0005/168827/Monkeys-beat-market-cap-indices_Final030413.pdf) clearly demonstrate that the arbitraging resulting from overweighing narrow indexes in a majority of portfolio makes market cap weighted indices perform worse than any other weighing method (including throwing darts). So definitely, a market depth measurement has to deal with very large indices, and if possible not do market cap.<br /><br />As trend followers, we need (imo) pay attention to the global trend relative to our timeframe (weekly if I trade daily charts, etc...) to not overweight a portfolio counter-trend. To be honest, I do not short stocks in a global uptrend and that's it, I only take hedges on a global index. When the trend reverses, then its time for me to go short, even if shorting stocks is not my favorite sport. Also, I scale my position sizing on a very short moving average of my equity in terms of R lost/gained (so that if 4 trades in a row are winners and i come out of a string of loosers i dont wait 2 months to load back up).<br /><br />I'm not balsy enough to not apply a trend filter atm :).<br /><br />Thanks for all the good posts.pierrehttp://rentier-minimaliste.fr/noreply@blogger.comtag:blogger.com,1999:blog-26012405.post-12741424250442323032015-01-30T07:07:24.963+00:002015-01-30T07:07:24.963+00:00Excellent post Steve. Can I agree AND disagree? I ...Excellent post Steve. Can I agree AND disagree? I agree that each stock should be handled on its own merits...once you are in the position already. Where I would disagree would be prior to new entries. I would say that our trading age differs from the old by how correlated stocks are now due to etfs. They say that 4 out of 5 stocks trade with the general market, no doubt there are people out there that could pick that 1 out of 5, but why take the added risk for a new entry with the odds even more skewed against you? <br /><br />This is where I would begin to build and hone my watchlist for the strongest stocks, and then when the market clears its "filter" for trend health, I would begin to enter the strongest on my list. <br /><br />Could you just use the market as a broad indicator where you would want to be aggressive when the dominant index is in an "uptrend"? I would hold my current positions regardless of market direction once in them, but only take on new risk when the market was in a designated uptrend. This would naturally force the portfolio to be lightening up risk as the conditions get riskier and would be adding risk as conditions improved. <br /><br />Am I off base here or does that thinking make sense also? I have debated this issue with myself for years. This so far is the best solution I've come to. As you like say though, if it works for you then it works for you. <br /><br />Thanks Steve,<br />CodyC-Freehttps://www.blogger.com/profile/09472544384212623038noreply@blogger.com