Joined Nov 11, 2007
1,458 Blog Posts

Its All About the Odds

On the afternoon of Tuesday, July 7th, the SPY had shaved two points from its value, and the SPX was going to close beneath the 200 day simple moving average. The bears were out in droves, marauding and eating pic-a-nic baskets stolen from frightened bulls.

In the comments section of Fly’s blog I remarked that it was time to go long, and that I would do so, on the next open, at 25% of account value. Some traders agreed with my assessment; others asked if I was serious. Unfortunately, there was a select group who felt the need to berate my call.

No big deal, really, to be challenged on a market call. It happens a good bit around here. Often, I welcome a good challenge, as having to stand for my convictions makes me a better trader and system developer. So, In order to respond to the negativity and excessive bearishness in an appropriate manner, I did some testing and wrote this post: No Wonder 95% of All Traders Blow Up.

The post was meant to be provocative, and it certainly achieved my objective. However, what good is an unpopular entry, if I do not get to follow the trade through to the profitable exit?


Of course I did not know for sure whether this trade would be a winner or not, but I knew the odds were on my side. To be honest, there were several times when I was fairly certain the trade would be closed for a loss. But that is the thing about trading with the odds. If nothing else, trading with the odds gives me the conviction and staying power to see the trade through to the planned exit.

My SPY position will be sold this morning.

Should the SPY close higher today (Tuesday), it may be worthwhile to review Rob Hanna’s system for shorting when the index has closed up 2 days in choppy conditions. That’s right, I’m insinuating that it is getting to be the time to build short positions, just when many are getting excited about getting long.

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  1. franky

    Great post, Wood — thanks

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  2. dboehm

    Nice post as always Wood, but one question. Rob Hanna’s system states that the S&P must close under the 200-day MA, a condition which would be impossible considering the days opening. Do you find this condition insignificant, or is it just a little added risk to your plan to short regardless?

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  3. Woodshedder

    Great question dboehm. One issue to consider is whether it makes much difference if it is the 200dsma or the 195dsma or the 205dsma. When price is hovering right there at the average, I’m not sure how much difference it would make, but I could certainly test and find out.

    The main reason I linked to the study is because it was another example of a count-based entry, similar to the study I published of the 3 down days.

    I think the issue is significant, but especially so once price is able to hold above the average for an extended period of time.

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