Stock scream room

Discussion of the Stock portion of the Permanent Portfolio

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D1984
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Re: Stock scream room

Post by D1984 » Mon May 27, 2019 4:15 am

ochotona wrote:
Sun May 26, 2019 10:50 pm
I'm going to paper trade this one
What are you going to use to determine if you should be out or in during the two "bad months" of September and October? MACD? NH/NL? Relative Strength vs cash?
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ochotona
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Re: Stock scream room

Post by ochotona » Mon May 27, 2019 7:15 am

D1984 wrote:
Mon May 27, 2019 4:15 am
ochotona wrote:
Sun May 26, 2019 10:50 pm
I'm going to paper trade this one
What are you going to use to determine if you should be out or in during the two "bad months" of September and October? MACD? NH/NL? Relative Strength vs cash?
MACD, also the Recognia AI pattern recognition service offered to Schwab clients looks tailor made for this kind of thing. I admit there are many ways to interpret MACD.
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Re: Stock scream room

Post by pmward » Mon May 27, 2019 8:17 am

ochotona wrote:
Mon May 27, 2019 7:15 am
D1984 wrote:
Mon May 27, 2019 4:15 am
ochotona wrote:
Sun May 26, 2019 10:50 pm
I'm going to paper trade this one
What are you going to use to determine if you should be out or in during the two "bad months" of September and October? MACD? NH/NL? Relative Strength vs cash?
MACD, also the Recognia AI pattern recognition service offered to Schwab clients looks tailor made for this kind of thing. I admit there are many ways to interpret MACD.
MACD gives you a general feel for the strength and momentum of the trend. But it is absolutely useless as a market timing tool, no matter how you interpret it. It can always change on a dime. MACD is ok as a way to get extra confirmation on a narrative, but it's one of the worst tools to try to make buy/sell signals from. Also, I used to trade patterns, patterns fail all the time. False breakouts/breakdowns are a part of the game. This is why traders use risk management strategies like stop losses, scaling into positions, setting percentage limits on each individual position, hedging with options strategies like straddles, etc to be able to get out fast and limit damage if they are wrong.

The risk management strategies are MORE important than the technical strategy itself. Trading patterns and seasonality with MACD you would still be hard pressed to even get 50% accuracy in your calls and using a 100% all in or out bet (i.e. no risk management at all) means you're going to lose big time on the whole. If you want to trade you need to spend your time learning how to manage risk first, before you ever put on a single position. So how are you going to manage your risk with the random assortment of indicators that all are open to subjective interpretation? The reason most traders fail is because they don't pay attention to risk management. Everything for a trader starts and ends with risk management. I'm really trying to hammer this home for a reason. Those traders that can manage risk succeed, those that can't go bust. This is 100% true in all cases.

I'm not sure what's wrong with your current blend of buy and hold, PP hedging, and trend following? It's a much better strategy for someone without the knowledge in how to properly manage risk or the stomach for trading (which I know you don't from how you reacted to the trend following failure in December; you were not able to stick with the system after one false positive). Trading is more akin to gambling than investing, and that's why a lot of traders implement similar risk management strategies to professional gamblers. I'm trying to protect you from yourself here, haha. You're free to do what you want, but I think this is a mistake. If you want to trade, you need to learn from someone who knows what they are doing (and these days it can be hard to find legit teachers that really know what they are doing instead of just saying they do on the internet).
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ochotona
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Re: Stock scream room

Post by ochotona » Mon May 27, 2019 2:43 pm

I digitized SEP and OCT from 1928 - 2018. If you step away from these two months and go to cash, you gain 14 basis points on average each time you do it, over the entire 91 years. But you avoid some of the worst large drawdowns ever. SEP and OCT have 11 monthly drawdowns greater than 10% for this period. Seems pretty easy to just buy some puts, sell some, whatever makes you feel better. Or do nothing. It's like living in tornado country.
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Re: Stock scream room

Post by pmward » Mon May 27, 2019 3:36 pm

It's just random noise. Nothing more. The problem with backtesting is that it makes people believe in things that don't really exist.
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Re: Stock scream room

Post by mathjak107 » Mon May 27, 2019 3:44 pm

Well so far templeton was right .. the most expensive words in the English language when it comes to investing is THIS TIME IS DIFFERENT
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Re: Stock scream room

Post by pmward » Mon May 27, 2019 3:51 pm

mathjak107 wrote:
Mon May 27, 2019 3:44 pm
Well so far templeton was right .. the most expensive words in the English language when it comes to investing is THIS TIME IS DIFFERENT
The context he is speaking of with that comment is much different than seasonality and trying to call market tops.
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Re: Stock scream room

Post by dualstow » Mon May 27, 2019 3:59 pm

pmward wrote:
Mon May 27, 2019 3:36 pm
It's just random noise. Nothing more. The problem with backtesting is that it makes people believe in things that don't really exist.
It’s the financial version of ‘The Bible Code’.
https://www.goodreads.com/book/show/521 ... Bible_Code
Dow down 600+ points. Gold- well, see AdamSmith’s post in the gold scream rm
one of the cnbc guys I dislike just said you can track silver to the President’s tweets
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ochotona
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Re: Stock scream room

Post by ochotona » Mon May 27, 2019 5:07 pm

I'll be the first to admit that 1200 months is a small dataset.
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Re: Stock scream room

Post by pmward » Mon May 27, 2019 6:59 pm

It's not even the size of the dataset that matters, some things are simply random anomaly. The data in question, even over many years, is still also skewed heavily by a couple of really bad years, and those selloffs could have just as easily happened in November or December if the news that caused those selloffs would have come a few weeks later. It is also not something that repeats every year; it's a coin flip. I mean, even last year, we rallied all summer, and sold off in the winter during the "best time of the year for stocks". If you torture data enough you can make it tell you anything you want. I'm saying this because I don't want to see you lose a ton of money implementing a bad strategy. I'm also honestly not aware of anybody that really takes the "sell in May and go away" thing seriously. I follow a lot of institutional traders and investors, and I've never seen a single one use that as a basis for any of their moves.
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Re: Stock scream room

Post by Cortopassi » Tue May 28, 2019 12:58 pm

pmward, I like your writing and insights.

Wondering what your thoughts are regarding technical indicators becoming self fulfilling, since it seems so many people/algorithms use them? It *seems* there are plenty of bloggers (and shysters) who use these indicators very well, or to sell products, newsletter, subscriptions. Their "unique" indicator that gives clear buys and sells all the time.

That is, until you buy their subscription.

TA was yet another method I tried years back, and it simply failed for me. It was an attempt again to get the emotion out of trading and do it robotically, but you've got it right, you have to manage risk first. I did not.
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Re: Stock scream room

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.
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