Simple Timing system

R

RockOn

Full time employment: Posting here.
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So tear some holes in this. Since the market is falling pretty hard and the outcome "could be dire", what about this very simple timing system for today's environment?

Pick a number...I'll choose Dow 11,500.

Since it is fairly easy to get all in or all out of the markets today (or maybe just fully hedged with the 2x inverse funds if the commisions are too high with individual stocks); why not just go completely long if the DOW is above 11,500 and get completely out if it is below 11,500?

With this plan it is impossible to miss a bull market and impossible to experience financial ruin. If the market drops more one could also adjust the number from 11,500 to 11,000 or less.

The downside is small whipsaw losses through "the picked number" which could add up if it happens a lot but even that is better than financial ruin. (This is similar to the trading moving averages I realize)

Ok, let me have it......
 
- Don't minimize that whipsaw potential--it is real and a primary reason this won't work.

- Trading costs are not zero.

- If "technical" analysis worked, everyone would use it. The biggest money to be made in tech analysis is selling books and selling tips. "This is clearly a classic cup-and-saucer formation with a handle." Zzzzzz. A million variations have been tried, and there's no reason you shouldn't give this a go. Let us know how it turns out.
 
samclem said:
- Don't minimize that whipsaw potential--it is real and a primary reason this won't work.

- Trading costs are not zero.

- If "technical" analysis worked, everyone would use it. The biggest money to be made in tech analysis is selling books and selling tips. "This is clearly a classic cup-and-saucer formation with a handle." Zzzzzz. A million variations have been tried, and there's no reason you shouldn't give this a go. Let us know how it turns out.
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I'll acknowledge the whipsaws, you are correct, this is why a moving average type system usually doesn't work. My counter is that this time there seems to be a widespread difference of thinking on whether this crisis is really a crisis. When that gets resolved the market should go strongly one way or the other. Hopefully, (and it is hopefully) there would not be too many whipsaws. In the meantime, I can sleep easy at night, no risk of financial ruin. I think lots of sleep is being lost these days even though not many want to admit it.


Actually I could do this with zero trading costs, maybe you could not.

I'm not using cup and saucer or anything like that, this is too simple to be called technical analysis IMO.
 
I used to be a big technical analysis guy. I eventually discovered that it was a great way to sound knowledgeable and sophisticated in describing what happened to the market but totally useless in predicting anything.

What you are suggesting is a variation of sell/buy the 200 day moving average (or whatever average you want to pick). That's probably the oldest techical scheme around. The "sell if below and buy if above" only works twice. Once when it goes below and then when it returns "forever" above it. As it bounces around the limit, you'll be buying and selling like mad and you'll get ups and downs with lots of transaction costs. The alternative is to set a band about 50 points above and leave the sell at the fixed number. This will reduce your transactions but you'll miss some of the bounce. If it happens quickly, you'll miss a lot of it.

You can try it but then you've joined the world of market timers.
 
2B said:
I used to be a big technical analysis guy. I eventually discovered that it was a great way to sound knowledgeable and sophisticated in describing what happened to the market but totally useless in predicting anything.

What you are suggesting is a variation of sell/buy the 200 day moving average (or whatever average you want to pick). That's probably the oldest techical scheme around. The "sell if below and buy if above" only works twice. Once when it goes below and then when it returns "forever" above it. As it bounces around the limit, you'll be buying and selling like mad and you'll get ups and downs with lots of transaction costs. The alternative is to set a band about 50 points above and leave the sell at the fixed number. This will reduce your transactions but you'll miss some of the bounce. If it happens quickly, you'll miss a lot of it.

You can try it but then you've joined the world of market timers.
Click to expand...

All great points. On the last point, that its true. But isn't that superior to possible financial ruin at what feels like a highly risky time in the market? (I see Financial institutions tanking and read there may be much more in losses to come.) May a little dirty but very simple market timing be in line?
 
RockOn said:
I'm not using cup and saucer or anything like that, this is too simple to be called technical analysis IMO.
Click to expand...

I've learned that sometimes definitions are "flexible." Still, if a system looks strictly at stock price movements, it is "technical" analysis. If it depends on trying to determine something about the present stock prices and some underlying value measurement (P/E, etc) then it is "fundamental analysis"

This is "technical" analysis. Again, good luck. It might work. I think you'd have better luck, though, if you gave it a flashy name, invented some technical-sounding indicators, and did some carefully researched retrospective analysis for how it would have made investors rich in the past. Put this al together into a book or a subscription web site and you'll make far more money than if you'd actually applied it to your investments.
 
samclem said:
I've learned that sometimes definitions are "flexible." Still, if a system looks strictly at stock price movements, it is "technical" analysis. If it depends on trying to determine something about the present stock prices and some underlying value measurement (P/E, etc) then it is "fundamental analysis"

This is "technical" analysis. Again, good luck. It might work. I think you'd have better luck, though, if you gave it a flashy name, invented some technical-sounding indicators, and did some carefully researched retrospective analysis for how it would have made investors rich in the past. Put this al together into a book or a subscription web site and you'll make far more money than if you'd actually applied it to your investments.
Click to expand...

I agree with everything you said. But in this particular case I think it has merit. Mainly becasue I think the market could fall another 20 or 30% this time out if the credit news doesn't get better soon. (I'm starting to see pretty regular loses in the junk market, that's looking significant and could add a lot to overall credit problems) If that is wrong, I would at least have a plan to get back in. We will see what happens.
 
I'm no stock whiz but it seems like waiting for the market to drop back down to the same low when you bought is going to set you up to lose any gains you made and may still result in ruin as there's no reason the volume can't remain steady due to new businesses you aren't invested in growing while yours fail. If I was tossing around money in the market I'd be buying when the market dropped below a certain line, say 11000 on the DOW, and continue to buy until it reaches some threshold that you think the market should grow to, like 12500, when you stop buying. Then give yourself a moving threshold of say 1000 where if there is a drop from whatever peak is reached of 1000 or more you sell and get into something more stable until it drops to a reasonable level again.

Personally my numbers would be even lower because I think it could drop to the 7000-8000 range before it begins to climb again, and then I wonder what crazy reactionary laws are going to be passed because of the fall that might discourage business and force a lower bottom than what would naturally occur. But I'm a bit pessimistic.
 
Frug, I'm not sure I completely follow your idea but it does seem to still allow for financial ruin. That is the main reason for my plan, eliminating the possibility of a financial ruin outcome.
 
why not just go completely long if the DOW is above 11,500 and get completely out if it is below 11,500?
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To me it seems that the basic idea of trading is to buy low, sell high.
With your strategy of sell low, buy high, that would seem to INCREASE your odds of financial ruin, not decrease.
As others have said, it may work for you, but I think the odds are less than another strategy working for you.
 
well, using the numbers I threw out, if you bought up until 12500 but the market never gets up to 12500 before dropping on 1000 point on a 30 day average it could result in ruin if you sell then. I'd say keep your hard limit of 11000 for your peace of mind but otherwise continue to buy until it reaches 12500 then just hold onto it until it reaches a peak where it drops 1000 month to month. You might miss some crazy rally to 15000 after a drop of 1000 the previous month, but you're not going to be caught holding in a bear market either
 
Frugality_of_Apathy said:
well, using the numbers I threw out, if you bought up until 12500 but the market never gets up to 12500 before dropping on 1000 point on a 30 day average it could result in ruin if you sell then. I'd say keep your hard limit of 11000 for your peace of mind but otherwise continue to buy until it reaches 12500 then just hold onto it until it reaches a peak where it drops 1000 month to month. You might miss some crazy rally to 15000 after a drop of 1000 the previous month, but you're not going to be caught holding in a bear market either
Click to expand...

Ok. I get it. Another variation, but avoiding the worse case outcome with the hard 11000 limit.

Why hold stocks unless they are going up? Simplistic I know, but in this particular environment what is really wrong with it? If you are optimistic and fully believe the worse case will not happen, I know you can easily dismiss these ideas.
 
Zathras said:
To me it seems that the basic idea of trading is to buy low, sell high.
With your strategy of sell low, buy high, that would seem to INCREASE your odds of financial ruin, not decrease.
As others have said, it may work for you, but I think the odds are less than another strategy working for you.
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I don't see the sell low and buy high. I would try to buy at 11501 and sell if it goes below 11499, buy high and sell high maybe. The problem comes in if the market goes to 11550 on the day of the buy and drops to 11450 on the day of the sell. That is the whipsaw loss we've been discussing. Reducing the number of those before the bull market returns is the critical part of the equation.

There is zero risk of financial ruin (or even any loss for that matter) unless the number of whipsaw losses starts to add up.

I am also not advocating this for a permanent timing system, just until the extent of this banking/credit/mortgage crisis has really passed. It will not work as a long term system due to whipsaws. (Now if one could buy and sell at any particular price and there where no ovenight pricing problems, that could be another thing :))
 
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In addition to the points about whipsaws and transaction costs, you are subjecting yourself to gap moves. Imagine you had gone long the day before the 1987 market crash. The next day the market gap-opened down 10%. This is why all the dynamic portfolio insurers got killed that day. They couldn't get their hedges on when the market gapped down.

IMO, the best way to play this game is to buy a call option on the market struck at your threshold (e.g. 11,500). The option hedge ratio will automatically adjust, increasing your exposure as the market rises and decreasing it as the market falls. Of course, there will be an insurance cost (the option premium), but the payoff pattern will be similar to the one you are looking for, your downside will be fixed, and you will not be subjected to the transaction costs associated with whipsaws.
 
RockOn said:
I don't see the sell low and buy high. I would try to buy at 11501 and sell if it goes below 11499, buy high and sell high maybe. The problem comes in if the market goes to 11550 on the day of the buy and drops to 11450 on the day of the sell. That is the whipsaw loss we've been discussing. Reducing the number of those before the bull market returns is the critical part of the equation.

There is zero risk of financial ruin (or even any loss for that matter) unless the number of whipsaw losses starts to add up.

I am also not advocating this for a permanent timing system, just until the extent of this banking/credit/mortgage crisis has really passed. It will not work as a long term system due to whipsaws. (Now if one could buy and sell at any particular price and there where no ovenight pricing problems, that could be another thing :))
Click to expand...

If it works then you may be avoiding financial ruin but aren't you also missing the chance of big gains. When markets turn into bulls it is usually with some dramatic short term gains and if you don't buy until it gets back to a certain level then you miss all the big gains.

To limit the chance of financial ruin you may as well get out of the market all together and save a whole load of effort and paperwork.
 
Target Retirement 2015.

The dang Vanguard computers won't give me odds on the Pat's who I hear have a good football team but preseason hasn't started.

I do have a lefthanded, stolen from Ben Graham and the Norwegian widow timing system utilizing dividends and the unified general theory of chickenheartedness.

Probably too complex to be called a simple trading system. I'm too lazy to use my own theory.

The right handed version uses - pssst Wellesley.

heh heh heh - just kidding. :rolleyes: :cool:.
 
RockOn said:
I agree with everything you said. But in this particular case I think it has merit.
Click to expand...
Go for it, Dude! You may win, you may lose, but in any case you will be captain of your ship-and you will be able to add to the group knowledge of investing on this board. I don't think anyone has reported carefully on their experiences with kind of protocol before.

Ha
 
FIRE'd@51 said:
In addition to the points about whipsaws and transaction costs, you are subjecting yourself to gap moves. Imagine you had gone long the day before the 1987 market crash. The next day the market gap-opened down 10%. This is why all the dynamic portfolio insurers got killed that day. They couldn't get their hedges on when the market gapped down.

IMO, the best way to play this game is to buy a call option on the market struck at your threshold (e.g. 11,500). The option hedge ratio will automatically adjust, increasing your exposure as the market rises and decreasing it as the market falls. Of course, there will be an insurance cost (the option premium), but the payoff pattern will be similar to the one you are looking for, your downside will be fixed, and you will not be subjected to the transaction costs associated with whipsaws.
Click to expand...

I agree with the gap move problem. It doesn't happen that often but a huge gap move is possible when getting in or getting out. I think you nailed the biggest potential problem with this system. In this environment, once again it might be worth the risk though. It might be better than watching the portfolio melt away week after week.

Options are another option to excute the system, the trouble is they have cost and that cost isn't really minimal in percentage terms. If one can trade without fees, my way is a cheaper way to go as I calculate it. Options are a close second since the whipsaws might be less slightly less costly, maybe a tossup.
 
Alan said:
If it works then you may be avoiding financial ruin but aren't you also missing the chance of big gains. When markets turn into bulls it is usually with some dramatic short term gains and if you don't buy until it gets back to a certain level then you miss all the big gains.

To limit the chance of financial ruin you may as well get out of the market all together and save a whole load of effort and paperwork.
Click to expand...

I wouldn't be missing the chance of big gains if I set my number 5% or less above the market and moved it down if prices continued to fall.
 
RockOn said:
I wouldn't be missing the chance of big gains if I set my number 5% or less above the market and moved it down if prices continued to fall.
Click to expand...

Moving targets, oscillating markets, lots of trades, lots of paperwork. Sounds like a lot of work, but then I'm a lazy oik. ;)

Good luck with it.
 
Alan said:
Moving targets, oscillating markets, lots of trades, lots of paperwork. Sounds like a lot of work, but then I'm a lazy oik. ;)

Good luck with it.
Click to expand...

My dream senario would be just one target, 11500.... one trade, when the crisis clears and the bull resumes.... no paperwork, and..... no work other than a few phone calls to make the moves.

Ok, I'll beat you to it.....if it sounds too good to be true....

I've been involved in markets long enough to know there is no holy grail, but scary times like this may lend themselves to a simple timing system. It's better than saying two years from now if things get nasty, god I wish I had done something to save my butt. To each their own though. If you are a true optimist, you might feel secure enough without thinking like this.
 
RockOn said:
I've been involved in markets long enough to know there is no holy grail, but scary times like this may lend themselves to a simple timing system. It's better than saying two years from now if things get nasty, god I wish I had done something to save my butt. To each their own though. If you are a true optimist, you might feel secure enough without thinking like this.
Click to expand...

Truth is I expect to be able not to touch my stock funds for a very long time. I have 40% of my stash in stocks so a big cushion in bonds and cash, plus I'm drawing one small pension now ($5k/yr), will start drawing my main pension March 2010 then at 62 I'll have SS and DW's SS plus at 65 I'll have another small pension (12k COLA'd) and at 67 a UK SS.

If my butt was on the line, I don't know if I would be quite so optimistic.
 
haha said:
Go for it, Dude! You may win, you may lose, but in any case you will be captain of your ship-and you will be able to add to the group knowledge of investing on this board. I don't think anyone has reported carefully on their experiences with kind of protocol before.

Ha
Click to expand...

I agree. If I remember correctly, a lot of guys got really rich day trading in 1999 and 2000. Make sure you use alot of leverage to amplify the gains.

Keep us posted.
 
Alan said:
Truth is I expect to be able not to touch my stock funds for a very long time. I have 40% of my stash in stocks so a big cushion in bonds and cash, plus I'm drawing one small pension now ($5k/yr), will start drawing my main pension March 2010 then at 62 I'll have SS and DW's SS plus at 65 I'll have another small pension (12k COLA'd) and at 67 a UK SS.

If my butt was on the line, I don't know if I would be quite so optimistic.
Click to expand...

In your case and the case of many younger people, it makes less sense to try to protect oneself. I'm not sure what percentage of ER's are in those boats but I think many would be hurt seriously if things turn out badly and the market was 30% lower 2 years from now along with another fall in real estate prices.

We don't know what will happen but the bad senario does seem at least possible with what I see developing. Everyone has to evaluate that on their own. If someone knows things will not get much worse, please tell me so I can buy into any fruther declines and not have to think about downside protection.
 
newporttony said:
I agree. If I remember correctly, a lot of guys got really rich day trading in 1999 and 2000. Make sure you use alot of leverage to amplify the gains.

Keep us posted.
Click to expand...

What I am talking about is not day trading. I'm a bit surprised you cannot see the difference. I'm looking to substitute some potential upside gain for short term downside protection. That is slightly different than what the much wiser financial industry did to us with leverage in recent years. ;)
 
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