For the most part, I have been Mr. Nice Guy, during my almost 3 years of financial blogging. I have chosen the “You can lead a horse to water…” approach, rather than force-feed information to those who are either unable or unwilling to understand and accept it. I have provided gifts, if you will, but because they were often wrapped in an old brown bag or the comics section of the newspaper, many readers have chosen to ignore them, instead of unwrapping them and marveling at their splendor.
Lately though the stupidity of some of the readers of iBankCoin has been unnerving. I have become very frustrated by the generally wrong, typically under-educated, and always over-confident miscreant who declares, “There is no edge in this trade!” or “The head and shoulders top is in!” or any variety of over-the-top emotional outbursts. These folks have no idea what they are talking about.
Case in point:
The level of bearishness on the blogs today was overwhelming. Many of these folks are ready to short any stock with one, two, three, or four letters in its symbol. The fact of the matter is that shorting here is an AWFUL setup. Just plain AWFUL. Yet, any attempt to challenge this bearishness with knowledge and cold, hard data is met with derision. Basically, knowledge is being countered with foolish idiocy.
Let me show you people who were all gung ho to pile in on the short-side today what kind of odds/edge you are looking at.
The Study:
Since today was the third consecutive lower close, this study gets short the close anytime there will be three consecutive lower closes. To be clear, we will be shorting the SPY at the close, on the third consecutive lower close. I used all the data available for the SPY, with the first trade taking place in November, 1993. There were 355 instances of this setup.
The exit is a simple time exit. I am plotting what the results will be if you exit the at next close, the close two days later, and so on and so forth.
The test assumes $100,000 per trade, does not compound gains (losses, actually) and does not include commissions or slippage.
Please, if you do not understand what the graphs are showing, I will be happy to explain it. Just ask.
Summary:
There is NO EDGE to shorting the SPY at today’s close, but you wouldn’t know that from listening to the myriad emotional train-wrecks who call themselves traders. No wonder 95% of all traders blow up.
100% agree.
Thanks Wood. Great post. It also saves me having to post a rant in the PeeGee about all the idiots that breeze in and out of the comments around here. I guess every trader has the right to blow up. I didn’t think the recent market was that difficult to ID. I think Chart Addict did a great job of describing what was happening on a daily basis. The tough part was deciding what to do: sit tight, hedge, sell, sell short. Will this be a “sideways” consolidation/correction or something else,etc.
I’m still surprised at how many people show up around here expecting trades on a silver platter, and those that don’t take responsibility for their trades. I guess some things never change…
Yes. The simple act of counting is a technique that so few use. Just look at the past few months, or even the worst part of the downturn in the past year and see how many down days you get in a row. Rarely is it 4. Depending on the market it is sometimes not even 3. Typically I use this when a position is going against me. Often it can give you the rational to wait a day to get out on better terms but as you point out it works just as well on entries. Niederhoffer talked about counting in “Education of a Speculator”.
That said, if enough money throws caution to the wind tomorrow and sells we could have an interesting morning.
I hear you wood and I agree with you.. The question is how hard of a bounce do we get? I am thinking close above $SPX 900 is not likely, but I guess There is possibility we bounce all the way to the 20 M/A. A re-trace to the 20 M/A would scare the shit out of the bears that piled on at the end of the day and make em’ cover. Anyways I will be looking to hedge in the morning. I am short via SDS from $SPX 930.
Goldie, hard to say, but I can make some educated guesses, based on the data.
If we instead went long at the third consecutive lower close, and sold on the 8th close (optimized), it looks like the average trade would yield 735.00, which translates to an average bounce of 0.73%
This setup, for going long has an edge, while it may not be a HUGE edge, it is a damn site better than getting short here.
Wood, all we got are educated guesses homie!!
The more I read my previous comment, the more I hate how I worded it. Anyway, the point is, I don’t think we should expect a huge move back up.
I’ve been talking about this type of setup since Sept.
I love that you posted this much detail on it, since unfortunately I can’t run the level of backtesting you can. The results are very similar though.
Great post, great points, and as always, sweet mullet.
What program do you use for back testing these different scenarios? They are very helpful. Thanks a ton.
You can use Excel to run simple scenarios like these.
The charts are drawn in Excel 2007, so probably that’s what Wood was using as well.
Sorry, I didn’t see Wood’s reply lower down.
Excel would work just fine, except that it would take some time to set up the sheet.
I run these through the backtesters and then export the data to supplement their built-in reports and charts.
Shed,
Erudite, supported by data, and well done as always. Thanks for the effort. Yours is an unhappy burden…educating the unwashed 🙂
Oh, and since I’m feeling good, here’s a site you must, and I mean must, check out.
Possibly NSFW, but I don’t know, I’m not a doctor.
http://www.textsfromlastnight.com/
LOL that is the second best website ever!!
Check out FMyLife too: http://www.fmylife.com
lol texts from last night and FMyLife… You’re ever pissed/sad/depressed/ready to jump, hop on those and you’ll be ROFLYAO til you can’t breathe.
Thanks Danny. I meant to link to one of your posts but forgot in my haste.
The haters especially hate me because of my mullet.
Simple minds cannot appreciate such a brilliant hair style. Business in the front, party in the back.
Mitch, np, you’re welcome. I’m glad they help. I use Tradestation and AmiBroker.
market is going to tank tomorrow for the 4th day.
this market is way outside the realm of historical prices.
way too many underwater longs now — because the REALITY is — most traders hang onto losses too long, until the pain becomes unbearable… once the market cracks another 200 points — then you get the real losers selling out.
The last 9 weeks reconditioned lemmings to believe the markets always bounce. Now that the maximum numbers of numbnuts are net long — the market crashes because Maximum Pain is the purpose of all markets. A bounce is like wishing for another Bailout. Prepare for the pain because nobody is expecting the last 3 months to get wiped out in 2 weeks. That’s the trade that will pay. And let’s face it – nobody has the balls to stay short the whole way down to Dow 6600.
anyone can happen, up 300 down 1000 that’s not the point.
the point is smart traders are good handicappers, and edges like this help you make informed decisions. It’s not about “not shorting a 200pt down day” tomorrow = bad trader, it’s about not getting your balls smashed in a drawer if the market moves higher by even 20 points, if that’s what a verifiable edge dictates.
What if I said I have a woman who will sleep with you, 66% chance shes a dude, 33% smoking hot lady.
What do you do? Well, if you’re trying to “score”in the classical sense of the word, you pass. Doesn’t mean one out of three won’t be smoking hot babes you missed, but the other two. Think of that.
anyone=anything
lmao @ that analogy. Excellent!
“What if I said I have a woman who will sleep with you, 66% chance shes a dude, 33% smoking hot lady.
What do you do? ”
..Wait for confirmation!!
rotflmao
Skeptical, you are spouting the very foolish idiocy I was just railing against.
Please share with us your data that shows the market to be “way outside the realm of historical prices.”
Your paragraph about underwater longs contradicts your first two statements.
And your last sentence contradicts the other 3 or four above it.
Yesterday was an up day BTW…
Yes, but the close was lower than the previous day’s close.
As soon as I hit send it occurred to me that is what you meant..
Thank you for the analysis Mr. Woodshedder. However, given that I set up my shorts around two weeks ago, I would appreciate it if you would cease disseminating this information. Let them pile in, I could use the quick cash.
I’m curious what your take on the large win/loss ratio around 13 days trading time indicates? It almost seems intuitive that that long a time frame should be more unpredictable.
And by that last comment I mean approach a value of one.
wow. nice discussion going on this site tonight.
Greetings Hammy. Patriots are always welcome here.
Mr. Thaler, good to see your fine, gentlemanly stature on this here blog.
Sorry to erode your edge.
13 days optimized to provide the best (albeit a negative) return.
As for the large win/loss ratio around 13 days, it makes sense that if you can hang on long enough, eventually your trade may go positive. By the same token, the longer you hang on, the better chance you have of having a larger trade. Or at least that is how I interpret it.
The win/loss ratio shows how big your winners are compared to your losers.
My only contention with this is that it seems to run counter to most probability theory; normally I would expect to see expectations approach some constant value (similar to the law of large numbers). Even expectations as determined by comparative magnitudes. Perhaps I’m putting too much into this time frame, or else don’t understand the parameters of the data?
Mr. Thaler, I think that you have misunderstood something about the test methodology or the data.
Either that or I am misunderstanding what you are trying to say 🙂
Let’s keep trying and see if we can get it figured out.
Based on this research, anytime we see a market setup as we have today, the mere act of shorting now and holding out for approximately 13 days would yield nearly 20% over large trading volumes. That seems almost too significant.
Not necessarily. Match the %profitable up with your win/loss ratio.
Even if the winners are 20% larger than the losers, you’re only profitable 37% of the time.
If you really want to figure it out, I’ll rerun the test and record the average win and average loss, and then we can plug those into the expectancy formula.
Wait ignore that. I seemed to have convinced myself that we were discussing the magnitudes of the wins and losses as opposed to their occurence.
Your backtest time period coincides with the most insane bull market runs of all time. Weird that shorting dips would not do well overall. Hmmm.
Buying after three red days in this environment always runs the small risk of getting your stopped gapped through in a panic move. It’s unlikely, but it’s the tail events that end your trading account.
Buying the H&S breach and 200 support is what everyone is gonna be doing. I may do it too, but keep the risk small.
why not just sit it out for a while and see where the market heads?
Hammy, actually this type of action can provide more of an edge than other times. Thus, it may be better to act than to wait.
Krusty, perhaps you know of another tradeable issue with a high r-squared to a broad index for me to test on?
What makes this setup more difficult is that more consecutive down closes means an even higher probability of a bounce (as Danny has pointed out 1000 times on his blog).
One of your best posts dude. Been loving your Dip Buy System as I’ve said before, and your trading rationale is one of my favorite on iBank.
You hit the nail on the head with this one!
I just think we have a macro picture that makes a 100 point gap down a damn near certainty at some point. No idea when. Most likely to happen around key support levels though, imo.
Main point was questioning the usefulness of SPY backtest runs. How about a backtest during periods where CA is paying employees in IOUs that the banks won’t honor?
Anyway, over time I think loss mitigation is more important that any type of TA. The title of your post says it all.
Krusty, loss mitigation is key. Also, not taking trades where the probability of loss is greater than gain is important as well.
The SPY data is unavailable before 1993. Testing on the indices themselveys is fraught with error since they are not tradeable. I choose to use the tradeable issues whenever possible.
How do you quantify “CA paying employees in IOUs?” Let me know and I’ll add the variable.
A thought just occurred to me… How many people that piled in at the close set a stop tonight slightly above the neckline on the $SPX?? I think we get enough of a bounce to at least take them out..
Some would say going short off apparent rejection of a key bear channel line is higher percentage than going long. Very possible both parties will be proven right in different time frames.
Back testing other bear markets makes more sense to me than including mostly data points from parabolic bull runs. To each his own. Good luck. I hope you get many more dips to buy.
Krusty, dude, we’ve had 2 bear markets in the time period I tested. That is 2 bear markets in 16 years, with one of the bears being the worst since the Great Depression. Are these bears not good enough for you? Did not the other bears have parabolic rises between them?
I would at this point rather have spikes to short, but thanks for the well-wishes.
I’m saying to focus on the bear phase only. Are we still in a bear phase? Who the fuck knows? I’m leaning towards yes since the real economy sucks goat ass. Do you trade the same in rising trends as falling trends? I don’t (or at least try not to, lol).
If the data says that buying the 4th day during a bear is just as good, then so be it. That’s the interesting part of the series to me. I guess I’m having trouble explaining it. I’m not busting on you, just trying to dig in a bit deeper.
Never mind Mr. Woodshedder, I figured out the source of my confusion. And the average expectation of it is one; all is well in the world. Thanks again for the presentation.
By the way, I’m curious; what is your profession? You seem to have background knowledge befitting of a mathematician or actuary. Perhaps I’ve just spent too much time around pseudo traders that I’ve lost respect for real ones.
Krusty, I’m a little sensitive, after all the zombie attacks of late. My apologies. I see what you are looking for.
I just ran a test, buying close of 4th consecutive down days…the optimized exit was 19 closes later.
Interestingly, the equity curve on this has been flat since 6/02.
Conversely, shorting the 4th consecutive closing low, and covering at the optimized exit of 3 closes later also produces a flat equity curve since 6/02, except for an uptick in September of 2008.
The fact that these are both producing flat equity curves since 02 is telling me something, but I’m not sure yet what it is.
Mr. Thaler, thank you very much for the compliment. While I hope I’m not as boring as an actuary, I do appreciate reference to me as a mathematician. I am, for better or worse, self-taught in that regard.
My original point was that long-tail crash events will happen after three or four consecutive red days too. 1987. Last year. Probably lots during the 30’s. This seems like a setup where 97% of the time you will come out fine, and 3% of the time you’ll get your account halved (and stops may not help).
The actual numbers would be interesting. To me at least. Maybe if I have time I’ll look at the Prophet data back to 1900 just for kicks.
Great post Wood. But it really does beg the question of if it is such a bad trade to go short then is it not a good trade to go long here?
Let me know if you run the data.
I understand very well your point about picking up nickels in front of the steamroller.
futures down.
Just use your head for 1 second:
– country is bankrupt
– oil is overpriced, housing is overpriced
– no jobs for years to come
– no consumer spending years to come
– huge deficits for years to come
– The last 9 weeks was based on GS bullshit manipulation. Now they’re short. We’re not even close to capitulation for bulls. Whatever happened in the past is not going to happen tomorrow. There’s no bounce coming now. Just a lot of hopeful bulls about to get kicked full on in the teeth.
THAT’s RIGHT. Fuck the world. Short that shit until humans turn back into apes.
Oh hell, Fly is going through one of his spells again. May I suggest some Pamprin?
Oh god, futures down .23% 9 hours before the markets open.
Your model requires the realization of all that you have written to be communicated, internalized, and acted upon by the entire financial community between now and 4:00 p.m. tomorrow.
Who said anything about capitulation? Only you. You can continue to argue with yourself about that since no one else is discussing it.
When you can bring me something quantifiable, that will help me understand the next few days of market action, then you will be bringing me something of value. Until you bring me that, I really could care less about what you *think* is going to happen.
Caveman, that could be an interesting discussion. It could depend on timeframe, maximum adverse excursions, and win/loss ratios, for starters.
Of course going long here has a %profitable in the mid 60s, but if the win/loss ratio is near 1, then maybe we don’t take the trade?
The other consideration is timeframe. If a trade has a very high expectancy the day of and day following the trade, and then trails off slowly, it may be worth taking, even if the w/l ratio is 1, as we would not expect to be in the trade very long.
I suspect that this trade would show a lower expectancy at first that increases the longer you stay in the trade. As Krusty has pointed out, we don’t want to be in these types of trades for a long time as they may expose us to a slight chance of a crash type scenario.
what ended up happening with that Denninger dude? did he apologize?
No, our budding Dictator slunk off to his basement lair beneath his Palace of Fascism.
Wood, nice work on the golden cross. I really enjoy your work. Dennis Kneale is the best.
Yup, good practical concerns. I was actually surprised the % profitable was not closer to 50%. That result looks statistically significant on the bad side which means taking the inverse trade is statististically signficant on the good side which surprises me. Based on stuff I have looked at, this just surprises me, I would have thought the results of this would have been no better (or worse) than flipping a coin. I may play with this one some more myself.
Let me know if you ever want the data to work with.
Funny thing is 80% of those 95% think they are in ‘remaining 5%’ and everybody else is in 95%. They are just not listening. Let them short!
LMAO over hear, thanks! Great post.
Krusty said: This seems like a setup where 97% of the time you will come out fine, and 3% of the time you’ll get your account halved (and stops may not help).
Proper risk management (position sizing & stops) will prevent the halving of one’s account.
At the end of the day, it is all about probabilities, the edge at this point is to the long side, not necessarily by a lot or for long, but to the long side it is.
Good thread Woodshedder. Thanks.
Performance is the ONLY thing that separates the “95%” from the “5%”. Everyone knows where they stand.
Wood, as you probably have figured out by now, many people get what they truly want out of the markets. Usually that is not money. Instead it is drama, wanting to be right, angst, agony, etc. etc. etc. A trader that is interested in making money would look at this post and flip it over and say, “hey, there is opportunity here!” and spend their time figuring out that opportunity. The others? Well, they can continue to post in the comments while the 5%’ers make off with their money.
Nice job Wood, keep it up.
WIG
There is NO EDGE to shorting the SPY at today’s close
————————
but there is one next morning on the pop
Bzik, rather hard to quantify that.
No edge at all.. right.
Keep telling yourself that. Your historical studies will undoubtedly outperform commonsense some day.
No edge at all being short, the “experts” claim…
Skeptical, lmao…you’ve just been waiting…waiting..waiting..Oh the indices turn red! Let me go bash Woodshedder! lol..
Must be a difficult cross to bear…You know, your need to be right all the time?
What will you say/do if we close green today?
Woodshedder,
I made a small alteration and ran the 3-days down ALONG WITH the close being under the 200 day SMA. With these parameters the results are a little different, but not exceedingly. I ran this using StockFetcher because it’s fast for me, but it does the job. Also, I used 2007 and 2008 only, which should be the best years in a long time for this approach. With all that in mind, the strategy is better than you presented, and DOES have an Edge, but it’s not really significant. .15% per trade in the best market ever (for the strategy) is not my idea of a good time. All that being said… I agree with your assessment… it’s not a great idea to go short here. Here are the results from StockFetcher:
There were 35 total stocks entered. Of those, 35 or 100.00% were complete and or 0.00% were open.
Of the 35 completed trades, 16 trades or 45.71%resulted in a net gain.
Your average net change for completed trades was: 0.15%.
The average draw down of your approach was: -2.67%.
The average max profit of your approach was: 1.89%
The Reward/Risk ratio for this approach is: 1.13
Annualized Return on Investment (ROI): 17.39%, the ROI of ^SPX was: -17.93%.
I know this is a very quick view and there are many alterations that could be applied, but I thought it might be interesting to your readers.
bill
Bill, great work. I like your addition of the relationship between the close and the 200dsma.
Given time tonight, I might run some additional tests with the added criteria, over previous bears, going back to the 60s, although I will have to use the SPX for the data, which is not tradeable.
I looked briefly at one other approach also. :
– 3 days down
– close is 200MA
That last addition, indicating a recent cross of price below the 200MA, actually supports your hypothesis even more, at least on the short test I ran.
bill
Skeptical,
How do you know if Goldman Sachs is short or long?
whoa, how’d i miss all this. 😀
Dude, your avatar RAWKS!
Here is a link that those who participated on this thread may find interesting.
http://quantifiableedges.blogspot.com/2008/05/lower-lows.html