Reversal systems

[promagma]

I have a reversal (semi auto) system, basically to short stocks that that are ripping up and long stocks that are tanking. Nothing fancy, very basic indicators. I haven't changed it for about a year.... a good steady performer, did fine in the bull run last year, but is getting hammered with the market running up since the Feb. 27th crash. My trades used to go into 0.5-1% profit (or stop out) within a few minutes to an hour. It seems pullbacks are hard to find these days. I need a super tight profit target to be barely profitable, regardless short or long trades.

I know the markets are constantly evolving, but does anybody have any thoughts on these conditions.

 

[lrm]

I don't have any thoughts about the market per-se, but IMO you need to apply the system that works well in a given market. As you observed, reversal systems are likely having a hard go of it lately because of the strong trends and breakouts. Do what the market is telling you to do: use a breakout/trend system until it changes again, then whip out your well proven reversal system .

Louis

 

[panzerman]

Quote from lrm:

IDo what the market is telling you to do: use a breakout/trend system until it changes again, then whip out your well proven reversal system .
Louis

The problem with this is that the timing of when markets change from trending to non-trending and vice versa is random. The market has been trending strongly for the past few weeks, but next week could just as easily be the start of a choppy market for a while, or could resume the trend the following week.

Stated another way, your favorite indicator will work until it doesn't. But when it starts or stops working is random.

 

[lrm]

Exactly. This fact is well known and is one of the big reasons why this is hard stuff. Multiple systems, risk management, money management, etc are all part of the equation. However, the simple fact remains: use a system that is appropriate for the market. Determining when and how to make the switch is part of what makes one successful in the long run.

Good luck!

Louis

 

[TrueStory]

I wouldn't worry too much about this system struggling a little right now. All systems have conditions which are most and least appropriate in which to trade, and they will go through (hopefully) small losing periods. An unprecedented bull run that matches the longest Dow run in 80 years is just the type of rare condition that I'm talking about. A system like yours, if built properly, would be profitable in most all market types. But this insane and irrational run is an anomaly.

 

[panzerman]

Quote from TrueStory:

I wouldn't worry too much about this system struggling a little right now. All systems have conditions which are most and least appropriate in which to trade, and they will go through (hopefully) small losing periods. An unprecedented bull run that matches the longest Dow run in 80 years is just the type of rare condition that I'm talking about. A system like yours, if built properly, would be profitable in most all market types. But this insane and irrational run is an anomaly.

If indicator performance is random, then so will be returns generated by that indicator. Random returns could give you a net positive P/L curve or a negative one, you never know until after the fact.

After the fact could give you a blowout year or a blowup year. Money management techniques can help smooth the curve but not do too much to make it net positive or net negative.

 

[TrueStory]

Quote from panzerman:

If indicator performance is random, then so will be returns generated by that indicator. Random returns could give you a net positive P/L curve or a negative one, you never know until after the fact.

After the fact could give you a blowout year or a blowup year. Money management techniques can help smooth the curve but not do too much to make it net positive or net negative.

Who said anything about indicators?

 

[gurucandidate]

promagma,

If you visited etfinvestmentoutlook.com you would see which groups/sectors are gaining strength or weakening.

Limit yourself to components of the groups/sectors whose ETF is showing exhaustion of the latest swing. Looking at their McClellan Volume oscillator or the ETF components A/D oscillator gives you an idea of the current strength of a move.

In addition you should have a setup where you are fading breakouts in stocks where the breakout on the daily is against the longer trend defined by the weekly. For example if on your daily the price is hitting the lower volatility band and on the weekly it is in the upper half the chances are good for a snapback.

Regards,

GC

 

[promagma]

Quote from panzerman:

If indicator performance is random, then so will be returns generated by that indicator. Random returns could give you a net positive P/L curve or a negative one, you never know until after the fact.

After the fact could give you a blowout year or a blowup year. Money management techniques can help smooth the curve but not do too much to make it net positive or net negative.

Yes I do use an indicator, among other things, and there is a clear edge over 9000 forward tested trades. But I do agree with the point about money management.

I hope some trend followers are doing well in these conditions. I wasn't trading in 1999 but maybe thing were bit like this. In any case I am working on some new strategies. What a ride on AMZN, CMI, MA, WHR, DNDN everyday, the list goes on.... at least Chabah is doing nicely.... and ProfLogic is cleaning up as usual

 

[promagma]

I ran some more numbers tonight, to see what's really going on. The winning % is down, but more interesting is how these stats turned around in Jan-Feb 07 ....

Old stat: Avg trades/day:32, Avg time in trade (before PT or SL hit):22 minutes

Since 3/1/07: Avg trades/day:18, Avg time in trade: 75 minutes

So the real issue is lower volatility, more drift. I eyeballed a couple hundred charts from old and recent trades. Last year, a volatile stock would typically give you 3-4 intraday reversals that were tradeable for 1% or more. These days the stocks are drifting in one direction or doing nothing all day, you are lucky to get 1 or 2 good reversals to trade.