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Old 07-19-2008, 11:27 PM   #121
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I'll have to think about your last statement. I suppose that is true as long as you do not trade but didn't someone sell you that stock? Didn't he lose if it goes up? I always thought of trading options as essentially the same as tading stock. You have a buyer and a seller, a bid and an ask, two people who think they are right, and a commission.
You can really boil things down to their essence!
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Old 07-19-2008, 11:31 PM   #122
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No
I'll go with that. I guess you are right, I'm still pondering on whether it is really different. You got it for now.
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Old 07-19-2008, 11:45 PM   #123
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3-4 years. Consistently did a *bit* better than the market with lower volatility for about 18 months. Then kinda sideways, then the market volatility (and premiums dropped) and I did a bit worse than the market, then volatility picked up, but I seem to get slammed from time to time.

I try to construct it to do a bit better than the market, with a bit of downside protection to reduce volatility. In theory, the premium that people are willing to pay to either reduce risk, or to gamble on gains should make this a profitable endeavor. But, as Yogi Berra said:

In theory there is no difference between theory and practice. In practice there is.


-ERD50
Thanks for the info. This is an idea of interest to me. You are looking for lower volatiliy without giving up on getting market type returns. I agree with your in theory assessment, it's like selling insurance or profiting from greed. But we should both know it can't be done.
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Old 07-20-2008, 02:12 PM   #124
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If anyone is interested in timing here is another very simple system by Marty Zweig. He is not just trying to use it at times like these, but as a full time system.

CXOAG Investing Notes - Martin Zweig's Four Percent Model Indicator

The average weekly gain fell from 0.23% to 0.22% percent, a loss of 4%
But the standard deviation went from 2.13% to 1.54% went down 28%.

Of course that is only true for the 25 year period period studied. It is possible to reduce risk and still get market type returns?
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Old 07-20-2008, 02:35 PM   #125
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Of course that is only true for the 25 year period period studied. It is possible to reduce risk and still get market type returns?
T A A N S A A F L.

Thousands of stock pickers and "technical analysts" (including Zweig) make their living convincing people that it is possible.

I could build you a back-tested model that does much better than Zweig's.

IMO, the most trustworthy and realistic way of reducing portfolio risk (measured as volatility) while increasing returns is through use of modern portfolio theory. The Basics of Investing and Portfolio Theory A lot of responsible folks have looked into it, and it has academic backing. It also works in the real world.
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Old 07-20-2008, 02:52 PM   #126
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T A A N S A A F L.

Thousands of stock pickers and "technical analysts" (including Zweig) make their living convincing people that it is possible.

I could build you a back-tested model that does much better than Zweig's.

IMO, the most trustworthy and realistic way of reducing portfolio risk (measured as volatility) while increasing returns is through use of modern portfolio theory. The Basics of Investing and Portfolio Theory A lot of responsible folks have looked into it, and it has academic backing. It also works in the real world.
That debate will continue forever I think. There are also many who say modern portfolio theory is completely bunk. It's easy to dismiss either side based on your point of few. "Works in the real world" is impossible to measure because the future is always unlike the past. So on it goes.....

You might be right that risk cannot be reduced while getting similar returns. That might be true overall but it is not true during certain periods with certain methods, this study proves that. I really am not sure because I see both sides make valid arguements. I'll lean toward your view, but in times like this (extreme uncertainty I would call it), I waiver some. There might be times when the risks are not worth faithfully following a theory.
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Old 07-20-2008, 02:58 PM   #127
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An observation that will probably come as no surprise to those here: Trading options (selling or buying either puts or calls) is a zero sum game. By definition, for every person that makes a dollar, someone loses a dollar. For every person on one end of a trade wo thinks he knows what will happen, there's someone else on the other end who is sure he knows. Add in substantial transaction costs and it's clear who the long-term winner always is.

Owning actual stocks (or MFs/ETFs, etc) is different--it is possible for everyone to make money.

that's only if you think of trading options like stocks, they are used extensively to hedge risk and if you read a basic options trading book or what any broker writes in their how to trade options page there are a few strategies where you can go long and short at the same time and make money on which makes more profit

i've sold call options before just to play with them, didn't lose anything. someone paid me to buy my stock at a specified price. and he or she got it
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Old 07-20-2008, 06:51 PM   #128
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I'm not sure if this thread is still on topic or not. A simple timing system is run by James Stewart (I searched this thread for his name using the simple search tool on the forum, so not sure if it was mentioned in this thread already). His method is reminiscent of the OP.
http://www.smartmoney.com/common-sense/
I probably got this wrong, but his method is sell on a 25% rise in stock and buy after a 10% pull-back. I forget which index he uses, but I think it's the NASDAQ.
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Old 07-20-2008, 08:22 PM   #129
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Well, at least then you are buying low, selling high.
The original idea in this thread (which I think has been dismissed by the OP (please correct me if I am wrong), was to sell low and buy high
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Old 07-20-2008, 08:48 PM   #130
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Well, at least then you are buying low, selling high.
The original idea in this thread (which I think has been dismissed by the OP (please correct me if I am wrong), was to sell low and buy high
The thread has drifted a bit, but to summarize. I have not dismissed the idea, it still might be a very good idea for this market, but the significant weaknesses of the approach have been identified.

It's not the holy grail of investment timing. If the bull market returns it will be easy to say why bother. If the SP500 falls another 30%, you may wish you had tried something like this.

To be clear on how simple my idea is...let's assume the level was set at Dow 11,400. I'd be 100% long right now as of Thursday. If the DOW falls below 11,400 I'd sell out 100% and wait for it to go above 11,400 before getting 100% long again. I could not miss out on another bull run that way, yet if the bear continues I'll be completely out. The problem is every time it goes above 11,400 and then below 11,400 before the next new bull market resumes, I'd have a whipsaw loss. How many times will that happen and what will those losses amount to? That's the risk and nobody knows ahead of time. At times like this it seems like it could be less risk than hoping for a bull market soon and possibly end up being very wrong about that.
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Old 07-21-2008, 02:23 PM   #131
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Guest, would you let us know when you decide to get back in the market? You seem to be pretty good at it.
or really lucky would probably be more accurate! There have been times when I feel as others have shared...."By my actions, I alone have changed the direction of the market!" hahaha

I like where I am right now....not losing. Soon I will be complaining that I'm not making enough followed by......
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Old 07-24-2008, 02:35 PM   #132
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So your system would have you sell today. You've been whip-sawed once now.

It will be interesting to watch this.

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To be clear on how simple my idea is...let's assume the level was set at Dow 11,400. I'd be 100% long right now as of Thursday. If the DOW falls below 11,400 I'd sell out 100% and wait for it to go above 11,400 before getting 100% long again. I could not miss out on another bull run that way, yet if the bear continues I'll be completely out. The problem is every time it goes above 11,400 and then below 11,400 before the next new bull market resumes, I'd have a whipsaw loss. How many times will that happen and what will those losses amount to? That's the risk and nobody knows ahead of time. At times like this it seems like it could be less risk than hoping for a bull market soon and possibly end up being very wrong about that.
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Old 07-24-2008, 05:28 PM   #133
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So your system would have you sell today. You've been whip-sawed once now.

It will be interesting to watch this.
I was going to post that whipsaw tonight but you beat me to it. With a 11,400 price level you are correct, I'd be down about 0.9% so far. But I would be sleeping very well tonight, knowing that if this was a suckers rally, I am safely 100% out.

Yes, it will interesting to watch what happens.
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Old 07-25-2008, 08:20 AM   #134
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Yes, it will interesting to watch what happens.
I agree - I hope we do follow it and post here. An hopefully, people don't think that that means we want to 'beat up' on RockOn if it fails, I simply want to learn from the idea.

While I am very skeptical that anything like this can 'work', I don't want to dismiss it out-of-hand. I think there is some merit to what RockOn proposed, but I also suspect the whipsaw/gap issues will doom it, but how do we know unless we track it?

We might learn something, even if that something is, 'this didn't work'.

-ERD50
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Old 07-25-2008, 10:33 AM   #135
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I agree - I hope we do follow it and post here. An hopefully, people don't think that that means we want to 'beat up' on RockOn if it fails, I simply want to learn from the idea.

While I am very skeptical that anything like this can 'work', I don't want to dismiss it out-of-hand. I think there is some merit to what RockOn proposed, but I also suspect the whipsaw/gap issues will doom it, but how do we know unless we track it?

We might learn something, even if that something is, 'this didn't work'.

-ERD50
We will see, it looks there could be another buy tonight. 11,400 was just picked out of the air, but it is as good as anything for watching this. If I were doing it for real, I'd look at support/resistance lines to pick my number. Of course, that's if one believes they have any value.

I don't care if I get beat up for this if it fails, it might but it might not! Beating up on me is fun anyway. I wouldn't let a few whipsaws bother me yet. After about 5 or 10, I'd be starting to get concerned.

If the market would drop significantly I would lower my number which would be good. We'll see if I get that chance. If the market rises enough, I may raise my number so the next whipsaw would be free. I'll post my revisions and the signals for you until it becomes boring. If the bear market is over, there will not be much to watch.
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Old 07-25-2008, 10:41 AM   #136
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I agree - I hope we do follow it and post here. An hopefully, people don't think that that means we want to 'beat up' on RockOn if it fails, I simply want to learn from the idea.

While I am very skeptical that anything like this can 'work', I don't want to dismiss it out-of-hand. I think there is some merit to what RockOn proposed, but I also suspect the whipsaw/gap issues will doom it, but how do we know unless we track it?

We might learn something, even if that something is, 'this didn't work'.

-ERD50
What's to follow? RockOn has proposed a simple trading rule. He trades once a day (if necessary) based upon the Dow's close. If it's below his strike price (e.g. 11,400), he is 100% cash - if it's above, he is 100% stock. We have years of historical data for the Dow. Just download the historical Dow data into a spreadsheet, and apply the trading rule. It couldn't be more simple. The cost relative to his desired payoff (i.e., the number of whipsaw losses) is how he pays for (i.e., the premium of) his "synthetic option".

This will be the theoretical best he can do, since there will be additional logistical problems associated with trading at the closing price, which will increase his transaction costs. Most mutual fund companies require that orders be placed at least 10 minutes before the close. Also, most have blackout periods after the sale (they don't want people dynamically trading their fund which runs up the expenses for all shareholders). This means that other transaction costs will be higher than RockOn claims. To actually implement the strategy will require trading ETF's (or futures) which involve commissions and bid/ask spreads, and, in the case of futures, variation margin. This will increase the whipsaw cost.
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Old 07-25-2008, 10:53 AM   #137
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What's to follow? RockOn has proposed a simple trading rule. He trades once a day (if necessary) based upon the Dow's close. If it's below his strike price (e.g. 11,400), he is 100% cash - if it's above, he is 100% stock. We have years of historical data for the Dow. Just download the historical Dow data into a spreadsheet, and apply the trading rule. It couldn't be more simple. The cost relative to his desired payoff (i.e., the number of whipsaw losses) is how he pays for (i.e., the premium of) his "synthetic option".

This will be the theoretical best he can do, since there will be additional logistical problems associated with trading at the closing price, which will increase his transaction costs. Most mutual fund companies require that orders be placed at least 10 minutes before the close. Also, most have blackout periods after the sale (they don't want people dynamically trading their fund which runs up the expenses for all shareholders). This means that other transaction costs will be higher than RockOn claims. To actually implement the strategy will require trading ETF's (or futures) which involve commissions and bid/ask spreads, and, in the case of futures, variation margin. This will increase the whipsaw cost.
I mostly agree. Yes there are some trading costs, I did not say there were none, even though I suppose it could have been implied. I could buy and sell Profunds or Rydex index funds at any broker for very low cost without trading limits. I could even go 2X leverage if I wanted too. Those funds do have large fees, so granted there are some costs to use them. As far as the cutoff time for trading, you are correct. That doesn't come into play that often, but it certainly could.

As far as using historical data, I don't think that applies because I am proposing to use during times of crisis management, not for regularly trading markets. (If one could avoid the whipsaws and gaps, it could be used all the time.) I know it is not clear when crisis times are, but when banks are going down and foreclosures are soaring, I'd say this is one of those times.
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Old 07-26-2008, 03:01 PM   #138
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In my early investing career, I traded a system very much like the OP's proposal... I sold when the price dropped below the 40 week moving average, and bought when the price went above the 40 WAR.

It was the whipsaws that finally got me to stop. Basically you are making a tradeoff: You are exchanging the rare possibility of whipsaws taking you down bad for a most likely possibility of slightly lower volatility and same or slightly lower returns.

It is kind of like getting in your car and driving on the highway: Most of the time it's going to work out great... but every now and then it goes horribly wrong and people die.

Another thing that got me off of trading and into buy and hold was the bid/ask spread. I don't think this has been mentioned here, but if you are trading equities there will always be a small difference the price you can get selling and what you can buy for. Every time you make an in and out trade cycle, you effectively lost that amount of money.

The argument that the whipsaws are not so much of a concern because you're not going to use this strategy very often? That's like saying you're not worried about how your tires perform in the rain because it doesn't rain very much. Or that because the downside risks are so great in the market right now that it's worthwhile for you to add more downside risks yourself?

Another thing to consider is that with a trading system like the OP proposes, any mistake will likely work against you; because you are selling when prices are falling, and buying when prices are rising, if you delay any of your trades for any reason the delay will very likely work out strongly against you.

And there are times when whipsaws happen; prices can cross above and below a particular price point hundreds of times in a short period of time. The only thing that you can do is delay your trades on one end or the other, which will cost you.
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Old 07-26-2008, 03:18 PM   #139
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Systems like this can work if you have an opinion on market direction. Say you wish to go long because you feel that stocks are strongly undervalued or whatever other fundamental reason you may have for expecting a large upward move, and all you want is timing and loss protection.

You trade your filter, with parameters that are suitable for the given index or stock or futures position. The rule might be an upside penetration by a certain %, or a penetration that is maintained for a week, or whatever you like. Use another rule for getting out. It only works if you are right on direction and size of move, but it is a way to probe the upside, or downside using inverse funds, with controlled risk.

Ha
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Old 07-26-2008, 03:19 PM   #140
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ETFs like SPY trade at very low spread, low commissions and no trade limit. Market's closed now, but I'll look again Monday, pretty slim IIRC.

-ERD50
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