Tuesday, July 21, 2009

Mark Hulbet On The Golden Cross

Today's column by Mark Hulbert on CBS Marketwatch is a perfect example of why people do not understand trend following methods. I have alot of respect for Mr. Hulbert. He has provided a truly valuable service to the subscribers of his newsletter, the Hulbert Financial Digest, which tracks the performance of over 300 trading advisory services. The last time I received a copy of it over 4 years ago, it opened my eyes to the enormous lack of integrity in some aspects of this business. At that time, to the best of my recollection, less than 10% of the services that he tracked actually made money for their subscribers on a 10 year basis. It may have been less than 5%. Anyway, the numbers were atrocious. Of course, some of those services complained that he did not track their trades properly, but that is a red herring. If he wasn't, then their subscribers probably weren't either. That knowledge inspired me to really dig deeper into what it would take to become a successful trader, and for that I am grateful.

Unfortunately, in some of his columns, Mr. Hulbert shows that he doesn't understand the statistics behind trading either. Today, he posted some statistics on the golden cross. I am sure he was using the simple moving averages and not the exponential moving averages, but I don't think it would have changed his numbers much. His analysis demonstrated that the Dow rose about 1.53% 3 months after a golden cross on average versus an average 3 month rolling gain of 1.59% for the Dow. Well, duh. That is exactly what I would expect. They are the same.

The real question is how many investors or traders actually realized that 1.59% rolling gain. The purpose of using the cross of moving averages for entering the market is to confirm to the investor or trader that the market is in fact going up (or down) so that they can realize or exceed that average again. The cross of the moving averages by itself does not constitute a trading system. It lacks the requisite risk management, trade management, and entry and exit methods required for a complete trading system.

If Mr. Hulbert were to revise his calculations to include a stop loss and trailing stop, I am pretty sure he would find that the numbers would be quite different.

5 comments:

dave said...

Sometimes some traders/investors need a triggering device like the GC.

Others more experienced (& successful) should rely upon their intuition more often. OTOH, for an inexperienced or bad trader to rely upon thier intuition is suicidal.

Regards,
dave

R. Craig Pritchard said...

My intuition seems to work best at extremes such as the March bottom, and the October 08 crash.

In the middle of the trend it pays for me to be more mechanical while paying attention to the cycles.

The most important thing with the moving averages, with any system for that matter, is adding a requirement for signal confirmation. Does the market continue in the direction of the signal? That alone will eliminate half of the false signals, the other half will get weeded out with stops.

dave said...

"...weeded out with stops"

I was just thinking last night how much better our performance & enjoyment would be if we were able to avoid trading lesser degree consolidations.

One thing that might help would be to only enter long on buy stops & exit longs on sell stops; enter shorts on sell stops & exit shorts on buy stops.

Also making better use of use of BB's & parabolic SARS. It also helps if one has a friend or knows someone who is a great contrary indicator. LOL. I know a trader who literally was freaking out last fall. Panic attacks. I saved the emails.

Regards,
dave

R. Craig Pritchard said...

I have done some research on profit taking for the Qs using the Marketclub 3 week system that showed that taking half profits at 2 weekly 10 period ATRs reduced the drawdowns while maintaining almost the same return.

In general for individual stocks I will look to exit half at 2 weekly ATRs or 40%+/- and trail a stop on the second half.

From what I can gather, most traders take profits too soon or too late. We can never really be sure which it is going to be, but if we take half profits, it needs to be at a level that a breakeven stop on the second half won't get hit due to normal volatility.

The other difficulty is that we expect trades to move right away, and more often than not they don't do anything for a long time.

This is hard because your brain remembers all of those 10 baggers that are so easy to spot in hind sight.

Anyway, I do agree with you except adding in taking partial profits.

dave said...

"The other difficulty is that we expect trades to move right away, and more often than not they don't do anything for a long time."

I have patience, but that drives me crazy.