Simple Timing system

[Hamlet]

There it goes. We've triggered our second buy.

Man, the market missed triggering a buy for RockOn's system by less than 3 points!

 

[FIRE'd@51]

There it goes. We've triggered our second buy.

which means the next whipsaw (if there is one) will cost at least 1.6%

 

[Hamlet]

Sell baby. Whipsawed.

which means the next whipsaw (if there is one) will cost at least 1.6%

 

[FIRE'd@51]

Sell baby. Whipsawed.

Yep, whipsaw cost = 1.8%

Total whipsaw cost so far = 2.7% (assuming no commissions or bid/ask spread)

 

[samclem]

Hey, a loss of 2.7% is a small price to pay for the outstanding protection this amazing system has provided over the entire life it's existence (4 days). The good news is, it can never go to zero! (Asymptotic to zero, but it will never actually reach it)

This is interesting, thanks for conducting the experiment. Usually after the flaws become obvious the originator of the trading scheme or his minions will propose a slight tweaking based on new insights into the mysterious machinations of the market. And the process continues ad infinitum.

 

[innova]

I'm giggling over here reading this.

The way to avoid a 30 percent loss is to diversify and understand your need/willingness to take risk.

Its ironic that proponents of active management (timers, TA, et al) quote Warren Buffett as support of their method - but he much more closely resembles the buy and holders.

Best way to reduce portfolio volatility? Stop checking it so often

What is the annual 'expense ratio' of the insurance method?

 

[haha]

Usually after the flaws become obvious the originator of the trading scheme or his minions will propose a slight tweaking based on new insights into the mysterious machinations of the market. And the process continues ad infinitum.

Are you guys in the business of destroying dreams? For shame!

Ha

 

[ERD50]

JULY 12th to AUG 4th close (according to my accounting):

Buy & Hold return %: -1.02%

RockOn return %: -2.66%

But, if this does end up saving someone from a 30% drop, it would be a cheap price to pay.

But I'll repeat - unless RockOn can define when to use and when not to use this system, you have to assume you are doing it all the time (and at what trip level?), so those gaps and spreads will add up at every turn.

-ERD50

 

[free4now]

And once RockOn defines the infrequent time periods when he would use this system, I'll propose a refinement that will stop the frequent whipsaw losses: Just get completely out of the market during the times you would otherwise use this system.

 

[samclem]

And once RockOn defines the infrequent time periods when he would use this system, I'll propose a refinement that will stop the frequent whipsaw losses: Just get completely out of the market during the times you would otherwise use this system.

Hey! Don't dismiss this system. In fact, I have a SURE FIRE way we can make money with it.
1) Keep tweaking it with hindsight-driven buying and selling rules until we can claim that "this method would have returned 85% per year average over the last 10 years, and never would have made less than 20% per year." It might mean that the buy/sell decisions are based on some type of numerology using the ticker symbols of the companies, etc. Doesn't matter--just write it down and get it witnessed/notarized.
2) Start a publicly-traded company to implement the plan for investors. Print up lots of slick brochures. There will be some regulatory hoops to jump through if we do this, so maybe instead we'll start a company to offer seminars and newsletters: "Enroll and we'll send you the buy/sell signals." Lots of radio ads and TV infomercials to pump it up.
3) Short our new company's stock like crazy.
4) When the public gets wise and the investigations begin, the company's stock will plummet. We'll all be rich.

All thanks to this stock-picking system--the system that will make us rich.

If I could have shorted Wade Cook, I would be wealthy today.

 

[ERD50]

And once RockOn defines the infrequent time periods when he would use this system, I'll propose a refinement that will stop the frequent whipsaw losses: Just get completely out of the market during the times you would otherwise use this system.

Ahhh, but that misses the intent of the approach. RockOn views the current market condition as being on the edge of divergence. He thinks it is either going up, or down, but does not know which.

Essentially, he is saying he can't predict direction, he's no 'dirty market timer'.

However, what he *is* saying, is that he can predict volatility. One can trade volatility just as one can trade direction (short or long). I know some very smart people who do this almost exclusively (no, I don't know their 'track record').

So, he is *not* a 'dirty market timer'. He *is* a 'dirty volatility timer'.

It's still a gamble, just a different game. -ERD50

 

[ERD50]

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?

CBOE - Micro Site

according to the cboe, yes. BXM has provided market returns with less volatility.

BXM generated superior risk-adjusted returns over the last 18 years, generating a return comparable to that of the S&P 500 with approximately two-thirds of the risk. (The compound annual return of the BXM was 11.77% compared to 11.67% for the S&P 500, and BXM returns were generated with a standard deviation of 9.29%, two-thirds of the 13.89% volatility of the S&P 500.)

-ERD50

 

[free4now]

However, what he *is* saying, is that he can predict volatility. One can trade volatility just as one can trade direction (short or long). I know some very smart people who do this almost exclusively (no, I don't know their 'track record').

Fair enough... but the proposed system tends to lose more money though whipsaw losses the more volatile it gets, so it seems like the wrong way to trade volatility predictions. There are many options-based vehicles that let you bet on volatility without the need to absorb whipsaw losses.

 

[ERD50]

There are many options-based vehicles that let you bet on volatility without the need to absorb whipsaw losses.

Agreed. And I think that a more illustrative way to look at what RockOn is proposing, is to look at option plays on an individual stock.

Let's say a stock is poised to release some info that will send it's stock way up or way down (an FDA drug trial report for example). Two approaches would be:

1) If you hold the stock, you could buy puts. You have a capped downside, and uncapped upside.

2) You could buy a put a little below the current stock price and a call a little above. You can make money if the stock swings wildly in either direction.

The reality is, if such volatility is known, those puts and calls are going to be priced very high. If the news is delayed, or ends up being 'further tests are required' or something, that stock may just sit in a holding pattern a while longer. Or maybe it moves, but not enough to cover the costs of both the call and the put. It's all just another version of 'no free lunch' - those people selling the options aren't going to do it at prices that would leave them losing money on average.

There is no end to the variations one can use for this game, calendar spreads, etc, all with funny sounding names and greek letters, but it is all just a variation on the 'no free lunch' principle, as far as I can tell.

And I doubt that RockOn's approach would be any better, but I still find it mildly interesting.

-ERD50

 

[haha]

CBOE - Micro Site

according to the cboe, yes. BXM has provided market returns with less volatility.
-ERD50

Are there tradeable products built on this index? (I found futures but nothing that can be traded in an ordinary brokerage account.)

Ha

 

[ERD50]

Are there tradeable products built on this index? (I found futures but nothing that can be traded in an ordinary brokerage account.)

Ha

yes, there are some funds following the approach. I'll dig up a list later, I have not researched them yet, but have been meaning to do so....


-ERD50

 

[haha]

yes, there are some funds following the approach. I'll dig up a list later, I have not researched them yet, but have been meaning to do so....-ERD50

Thnx.

 

[clifp]

Both Nuveen (JPZ, JPG, JSN, JLA) and Eaton Vance (ETW, EOI,EOS) , have a number of Closed End Funds using a buy writestrategy.

I bought a number of these funds back in Dec. when the discount to NAV widened to 15%. As the discounts have narrowed I've been selling the funds, since I am not thrilled with 1%+ ER. I still have ETW (Global) total return down 6% since late Dec
and JPZ (writes options on S&P 500) down 1% since Dec. They have ridiculously high 10% distribution ratios, and mediocre long term track records, but they did hold up well in a bear market.

 

[al_bundy]

The Big Picture | 300 Point Rally follow up

here is something for all you buy and holders can't miss any big up days because then i'll have 1% returns people. in the last 10 years most of the big up days in the Dow have been in bear markets and most times the Dow closed lower after the big up day

and in the late 2002 - 2007 bull market there were no 300 point up days, just slow and steady gains

 

[innova]

Valid argument, but perhaps you are missing the point...

If you are a long-term buy and holder, you don't really pay any attention to 300 point rallies so it doesn't matter. If you are really good, you look at your holdings only quarterly.

Plenty of other reasons not to active trade besides missing big up days.

 

[FIRE'd@51]

I don't know if anyone else is continuing to follow this strategy (this is what ER idleness does to a person ), but we had another whipsaw yesterday as the Dow closed below 11,400 at 11,348.55. The last buy-in was on August 5 at a closing Dow of 11,615.77. Hence, the whipsaw cost this time was 2.3%.

The total whipsaw cost so far has been 4.9%, assuming no transaction costs. For comparative purposes, I estimate that back on July 17 (the start date for this strategy), based upon the VIX volatility index that day, a 3-month put struck at 11,400 could have been purchased for approximately 4.7% of the strike. So this strategy has already cost more than the simple purchase of a put, and the put would still have 2 months left until expiration. Furthermore, even with the decline in implied market volatility over this period (VIX has declined from 25% to 21%), I estimate that the put would sell today for about 3.5% of the strike price, so the loss to-date on the put so far would have been about 1.2%, compared to 4.9% with this strategy.

As I said earlier in this thread, this strategy is a form of dynamic portfolio insurance (poorly implemented by the way, i.e. a bad trading rule). Even in the absence of gap moves (the bane of the dynamic insurers of 1987), this insurance methodology has already cost more than simply purchasing a put, and we are only one-third of the way through the time period.

 

[ERD50]

I don't know if anyone else is continuing to follow this strategy (this is what ER idleness does to a person ), but we had another whipsaw yesterday as the Dow closed below 11,400 at 11,348.55. The last buy-in was on August 5 at a closing Dow of 11,615.77. Hence, the whipsaw cost this time was 2.3%.

I'm guilty of ER-idleness also. Or is it intellectually stimulating, financial analysis? Either way, another buy-in today @ 11,417.43!

So this strategy has already cost more than the simple purchase of a put, and the put would still have 2 months left until expiration.

And I don't think buying puts is a good long term method either, it is bound to cost you more than the protection you receive, or the sellers wouldn't sell at that price. No silver bullets, darn it!

-ERD50

 

[Zathras]

Another sale today. Although it wasn't too far off the last buy

 

[Hamlet]

And now another buy. I think this strategy is pretty much toast. It's like the market has decided to bounce around 11400 forever

 

[Florida]

why not just go completely long if the DOW is above 11,500 and get completely out if it is below 11,500?

What exactly would you buy to go long the DOW?
ETF, mutual fund?

What symbol?