Post
by pmward » Tue May 28, 2019 1:35 pm
Oh geez, I could write a book. I know I've mentioned it here in a few places, but I used to be a swing trader, mostly in the realms of individual small cap growth stocks and the general market ETF's (SPY, QQQ, IWM, GLD, TLT, USO, and the Spyder sector ETF's were my favorites). I did pretty well with it and really only stopped because I found that the stress and time involved were not worth it; the juice was not worth the squeeze. And when I discovered the PP and MPT I realized there was a way I could protect myself without having to actively monitor all my positions. Buy and hold with no downside protection has never made any sense to me, and that's what drew me to trading and then in turn to the PP.
So with that experience I can tell you that there is no such thing as a foolproof system. Technical analysis and quantitative analysis do have value; much more value than they get credit for on the popular forums like Reddit, Bogleheads, and even here. It's not so much that TA or QA fail investors, its that investors expectations of TA and QA are way way way too high. There is no foolproof system. There is no magic indicator. All you can do is "analyze" the markets. What TA specifically does is measure market sentiment by looking at some combination of price, volume, trend, and momentum. That's it. It makes no judgements or predictions, that's the art that needs to learned in how to interpret that data; it's simply a way of analyzing data.
When using TA or QA what you are doing is looking at probabilities. TA and QA are backward looking not forward looking. They can describe what happened, but it's up to you to decipher what the probability of what will happen next. But, since nobody can see the future nobody can ever be certain. It's just a game of probabilities. There are always going to be indicators or data points that are bullish and bearish at any period of time. So you don't want to stick to any one data point. I might see a bullish chart pattern, but volume could be low. Large caps could be breaking out, but small caps could be breaking down. Price may be moving up, but momentum may be trending down. You have to look at it from all angles, and use all of that information to make a judgement call. Then, when you have a high probability move, when you place on a position, you need to use risk management to make sure that you don't lose. I used to have a rule where I would never risk more than 1% of my portfolio on any one trade. So, that means if I put on a position that was 10% of my portfolio I could withstand a 10% loss on that position. If I put on a 20% position, I could withstand a 5% loss on that position. If I put on a 100% position, I could only withstand a 1% loss. I also held myself to a maximum of 5% total capitol at risk at any one time, so 5 positions with a maximum loss of 1% of my portfolio each was my max (I usually had 1-2 positions on most of the time, really only in strongly trending markets would I be fully invested). I would also regularly scale into and out of positions to further manage risk. On top of all of that I would also raise my stop loss as my positions went up to lock in gains (there's nothing worse than giving back a large gain, I learned this lesson early on the hard way as one of my first trades was a stock that broke out for a quick 50% gain in the course of a couple days, and I got greedy and wound up closing it out like 3 weeks later for a 13% loss).
Contrary to popular belief, most good traders lose more than they win. BUT they manage their risk so that they cut their losses short and let their winners run. Most traders won't go into a position without at least 3-5x potential gain vs potential loss. Risk management is the most important piece because it means you don't have to be right often, so long as you catch a big winner every now and again. It also limits your total potential downside losses. Trading can work very well, but it has a cost in that it is very time consuming, it takes a long time to learn and a lifetime to master, and it can be very stressful as well. You really get to see a lot of who you are and how you react to fear and greed when you're playing the day to day tape.
So yes, technicals do provide a lot of value, more than they get credit for, but they are not magic nor are they foolproof. Playing with TA or QA without having any form of risk management is playing with fire, and this is where most people get burned. They go all in on TA or QA and pay no mind to the most important part, managing their risk.
Also, things are always changing. One indicator or data point might work really well for awhile, then magically it stops working. TA and QA are strategies that need to be constantly tweaked and adapted as things are always changing. Which is why I'm always skeptical of backtest data conclusions. People find something in a backtest that looks good, then they look for a reason to justify it. It should be the other way around. They should instead for a theory and then look back to see if the data doesn't prove it wrong. Also, backtesting is better at proving what *doesn't* work as opposed to what does work.
Finally, for people trying to sell you their wares, as with anything you have to be careful and skeptical of everything. There are some legit resources out there that will teach you some stuff, but there are sure a lot of false prophets out there as well. In general, it's better to be taught how to fish as opposed to paying for fish. The better TA educators out there are the ones that teach you how to perform analysis, not the ones that try to lock you into their proprietary signals. And any teacher that teaches TA or QA without covering risk management strategies are someone I would also avoid. The good teachers always start with risk management and move out from there.
One last thing I will say is that even though I don't "trade" using technicals anymore, I still use technicals all the time to analyze the assets I'm invested in with my golden butterfly. I use what I see here to help guide my decisions of when to rebalance, how much to rebalance, if I should cut my cash position down a few percent to buy another asset on a dip, what specific assets I should put money in on each paycheck, etc. Small tweaks that add a bit of alpha here or there. I also view the small cap portion as a 20% VP and if I ever have a very strong conviction in a certain narrative come up I would not hesitate to use some of that allocation to play it.