Why moving-average strategies are risky

[Butterball]

Quote from xelite777:

Studies and backtests simply reveal that indexes like the S&P 500 (and stocks in general) have a higher tendency to return to their average (mean) than other financial instruments. And as such, they respond better to counter-trend indicators like the RSI.

This is the typical ET gospel. You throw around your opinion as if it were fact. The above reflects your experience, it doesn't necessarily apply to all datasets.

Quote from xelite777:
For example, shorting stocks that have just made a 3-day low is a losing proposition, contrary to what most people believe. Do the backtest and see for yourself.

3 day low? You know what different timeframes means, yes?

Regarding backtests, here is the infamous 85+ year Ken French dataset that directly disputes your contention that stocks universally mean-revert: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html ('momentum factor')

In fact, momentum profits (e.g. on a 12 month time frame, buying the top decile and shorting the bottom decile of all Russell 3000 stocks) can happily coexist with contrarian profits (e.g. buying the 5 day bottom decile and shorting the top 5 day decile of all Russell 3000 stocks).

If you want to read some research on the topic, goto http://papers.ssrn.com/sol3/results.cfm and search for 'contrarian profits' (for what you call mean reversion) and 'momentum profits' (for what ET calls trend following).

 

[xelite777]

Quote from Butterball:

This is the typical ET gospel. You throw around your opinion as if it were fact. The above reflects your experience, it doesn't necessarily apply to all datasets.

I ONLY trade with facts, not opinions! I have read over 300 trading books and they all say the same thing, while backing up their claims with intensive backtests: Stocks indexes and stocks are mean-reversing instruments, period.

If you can prove otherwise we are all ears.

Quote from Butterball:3 day low? You know what different timeframes means, yes?

I have been trading for over 34 years so please refrain from using that kind of tone with me, sonny boy.

The 3-day low was just an example. If you want shorter time frames try to short the S&P 500 30 minutes after the open if the current close is below the open and see what happens, on the 1 or 5 min time frame for example.

Quote from Butterball:Regarding backtests, here is the infamous 85+ year Ken French dataset that directly disputes your contention that stocks universally mean-revert: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html ('momentum factor')

I triple dare you to explain in plain English what these "studies" mean? I even bet you have no clue.

What you don't know is that there is still another serious study that proves the mean-reverting nature of financial instruments like the S&P 500, 400 Mid Cap or 600 Small Cap, it's called "Profitable Mean Reversion after Large Price Drops" (click on "Download this paper", it's in PDF format). Oddly enough, it's from the same source you are referring to : http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2272795

Now try to do the same thing with highly trending markets like the Forex or the Interest Rate markets and you will get crushed.

Why?

Because unlike the S&P 500, these markets do NOT have a tendency to revert to the mean.

Enough said, I have to study my Forex charts now and get ready for tomorrow.

 

[Butterball]

Quote from xelite777:

I triple dare you to explain in plain English what these "studies" mean? I even bet you have no clue.

I explained it above:

In fact, momentum profits (e.g. on a 12 month time frame, buying the top decile and shorting the bottom decile of all Russell 3000 stocks) can happily coexist with contrarian profits (e.g. buying the 5 day bottom decile and shorting the top 5 day decile of all Russell 3000 stocks).

You can't compute something as simple as that can you? 34 investing in your IRA doesn't make you a trader; you're absolutely clueless.

 

[xelite777]

Quote from Butterball:

I explained it above:

In fact, momentum profits (e.g. on a 12 month time frame, buying the top decile and shorting the bottom decile of all Russell 3000 stocks) can happily coexist with contrarian profits (e.g. buying the 5 day bottom decile and shorting the top 5 day decile of all Russell 3000 stocks).

Wow, what an explanation, a simple sentence! Pffff....

By the way, a momentum strategy is only a small subset of a global trend-following strategy, but these two trading concepts are NOT equivalent.

Momentum is short-term oriented, while trend following techniques usually stay with the trend until it breaks.

And contrarian trading has nothing to do with mean-reverting strategies, even though the idea behind these two methodologies seems to be the same.

Quote from Butterball:

you're absolutely clueless

If you say so.

 

[Rorschach_test]

Quote from Butterball:

I explained it above:

In fact, momentum profits (e.g. on a 12 month time frame, buying the top decile and shorting the bottom decile of all Russell 3000 stocks) can happily coexist with contrarian profits (e.g. buying the 5 day bottom decile and shorting the top 5 day decile of all Russell 3000 stocks).

You can't compute something as simple as that can you? 34 investing in your IRA doesn't make you a trader; you're absolutely clueless.

on the macro scale momentum is rare,not many are willing to wait,so the majority is not below the tailbone for no reason.the one who believes in the mean revert markets is probably under the influence of a fairy tales narrator.