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.