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Hi Scott, Re: Holy Grail Trading Systems....
Humans are social creatures, and move about in herds, i.e. trends. When trends end, the herd starts to break up, i.e., the market gets fraggy. Pick any index chart of 2007 and you'll see the trend start to disentegrate. The same will happen at the bear market bottom. More and more folks will have confidence in going long stock than short.
Most folks never look at long term analysis. They're focused on daily stuff where, in fact, the most random noise occurs. The Big Picture shows how things are and how human behaviours don't change.
I think AIM can be improved with a little timing help and some hedging. It pretty much allows enough cash reserves to plow thru normal bear markets.
For the newbies, here's an excerpt about Holy Grail trading systems.
Article: In Search of the Holy Grail
In literature, the 'Holy Grail' is generally considered to be the cup from which Christ drank at the Last Supper and the one used by Joseph of Arimathea to catch his blood as he hung on the cross. The term 'holy grail' has been used among traders to represent the ultimate mechanical trading system that would return unlimited wealth. Though many seasoned traders say the Holy Grail does not exist, it is a never ending pursuit of many traders to find a Holy Grail. Armed with a computer as a research tool, thousands of traders have tested their ideas against historical data sets in search of the ultimate trading system. Many ideas are marketed, surrounded by claims of phenomenal success with graphs showing the hypothetical accumulation of wealth if the system had been used to trade financial markets over the past few years. Many of these mechanical systems are promoted with 'rags-to-riches' testimonials in the advertising literature which arrives unsolicited in my mail box each week.
Perhaps it has been my luck to just be unlucky. The $3000 systems I am familiar with have ended up being more phony than legitimate. Thus, my bias is more likely to embrace the philosophy that the Holy Grail does not exist. I consider the following are very valid questions to ask about any system being offered.
Why does an author bother to sell a trading system if it does all that the author claims? Why doesn't the author acquire unlimited wealth by using his Holy Grail, instead of being bothered with advertising, marketing, trade shows, customer support, and criticism?
Has the system withstood the test of time? If it was 'holy' a decade ago, shouldn't it still be highly sought after now?
What happened to the 'rags-to-riches' folks who had their testimonials published a year ago?
Sorry I do not have the answers to these questions. However, the real purpose of this article is to discuss the challenges of designing mechanical trading systems. Consideration of these principles in one's design should be helpful to those who engage in a search for the Holy Grail.
Type of Market
We all realize that there are different types of markets, namely: trending, swing, and choppy. Different systems try to take advantage of a particular type of market, and their results look great when applied to the type of market they were designed for. These systems have poor results in the wrong type of market. System designers feel they have a great system if they can put money in the bank when the market is the right type, and break even when the market is the wrong type.
Studies serve as a basis for the design of many trading system, or are used as either a filter or a signal in the system design. The following common studies have been categorized by the type of market they work best with.
Trending - Moving Averages, Parabolic Stop, Volatility Stop, Trailing Stop, Directional Movement Index, Channels
Swing - Stochastics, Relative Strength Index, MACD, Commodity Channel Index, Pesavento Patterns, Fibonacci, Divergence
Choppy - can't think of anything that works well with choppy. Most traders prefer to stand aside in choppy markets.
Traders often try to label the Elliot wave counts so they can anticipate the type of market unfolding, whether the market is in a consolidating wave 4 triangle, or whether a wave 3 breakout thrust is underway. They can then adjust their trading strategy for the type of market.
Slippage
Some systems suffer from trading too frequently. Commissions and slippage costs become a high percentage of the expected gain. For example, if two systems both generate a profit of $4000, would you prefer system A that did so with 10 trades or system B that did so with 100 trades? The average trade in system A is $400 while the average trade in system B is $40. For example, if the fills in real life are one tick worse in the E-mini markets, $25 has evaporated from the average trade results, and the penalty on 100 trades is more severe than on 10 trades. Thus, a big factor to consider in evaluating a system's success record is the number of trades. Too few trades may not be statistically sound, and too many trades may suffer from commissions and slippage losses, not to mention the constant wear it is on one's emotions.
Emotion
Emotion is one of the hardest areas to design for. The whole reason traders seek a Holy Grail is because they have had a few bad experiences in the markets, and no longer trust themselves to trade well.. They assume that the computer can analyze the facts more logically and pull the trigger more mechanically, which are areas they feel they need help with. The results look good on paper, up $60,000 for the year with the system, and the maximum draw down looks tolerable compared to the benefit. So, courage is mustered and commitment to faithfully follow the system's signals is expressed to one's friends.
But what happens over the next couple weeks. Our emotions want instant success. We are unwilling to tolerate a series of losing trades. All systems eventually have a string of losing trades and a draw down in equity. Such is part of the statistical results buried somewhere in those beautiful graphs of wealth accumulation. However, a graph of past performance is emotionless. The real thing, with my money on the line, is 100% emotion. When I am ahead I am elated at how easy it is. When I am behind, I start to second guess every signal and think I am smarter than the system, and I can improve on the trading system by applying my experience. Surely I am aware of intangibles the system failed to consider. For example, does the trading system know what is the correct thing to do when the news is showing horrifying pictures of planes flying into tall buildings, or war has broken out in the Middle East, or the dock workers have decided to go on strike, or Greenspan is speaking before Congress? Suddenly we convince ourselves we know more than the Holy Grail system, and we abandon it as we seek a place of greater personal comfort.
It is easier to design a mechanical system than it is to actually trade it! I know... I have been there and done that.
Tim
Hi Adam, Re Hedging...
Yes, it's additional work and study for the procedures. Everyone has to know their individual "sleeping point" on the risk. The current malaise is no ordinary bear market; rather a once in 80 year event. Projections for prices, earnings, et al, is a shot in the dark. At the root of it all, is the housing market and that doesn't turn like an anticipatory market like stocks. It needs time to heal and correct itself. I'm tracking it most closely.
Best, Tim
Hi Scott, Re: Holy Grail
In a bull market with an established trend, there's no need for hedges. The exception is where the trend gets "fraggy" and starts to break up. They're easy to see on any basic chart.
I can't predict markets and no one can except the man upstairs and he's not telling us! It's a game of probabilities where the reward of being long outweighs the risk of loss.
Markets are not as random as thought according to this recent study of the Chinese market. Have a look.
http://findarticles.com/p/articles/mi_qa5466/is_200704/ai_n21292807/pg_1?tag=artBody;col1
In the current market here in the U.S., it's most uncertain to predict a bottom as black swans can bomb us at will. No one wants to get bombed with B.S. poop!
Tim
Hi Scott, Re: Holy Grail...
There is no such thing and especially in this market. Way too many cross currents and issues to have a clear cut bottom. In a previous post I mentioned this market bottom is likely to be unique as are our current economic issues. What will happen is a process of bottoming and that will take time and depend on what "black swan" events come our way. We have a new President; he's going to be tested by folks that don't like us or him. Those events will move markets in unison due to the correlation of all markets now that wasn't in the past.
Taking profits in rallys requires your best judgement of supply/demand. When demand goes way, or supply increases, one exits. Tom Veale has described building an equity warehouse. It's an apt analogy. AIM has you buying the increased supply at low prices and selling at higher prices on increased demand. You can substitute any other merchandise whether it's bonds, commodities, or widgets.
If one uses AIM in a bear market in the "long stock" style, then one has to hedge to protect against losses or suffer thru periods of decline and wait for an eventual sustained rebound. Clive has hedged his positions with managed futures to protect against losses. I use options. Either way, one manages the risk so one never losses extraordinary amounts of capital for the equity warehouse.
I'm surprised that very few people here are concerned about hedging in a bear market. I wonder why....
Best, Tim
Countertrend Rally, Housing Woes...
Happy Thanksgiving everyone. Today is a good day to digest some information on our blossoming countertrend rally. Fresh supply is coming our way from another family, the Satellite Group, of blown up hedge funds. It's estimated another 200 billion dollars in supply is coming back into the market, in total, from the industry. The rally has been sparked to try and absorb the supply and distribute it to new owners. Many novice investors will be buying likely in a buy and hold fashion. View this rally as a tradeable one, but take profits when it ends.
On the housing front, at the root of the country's economic problems, the S&P Case Schiller Indexes tell the tale and adds another unmentioned component, affordability. The U.S. media completely overlooks this component, while it is vital for the industry to recover. The lay offs and job cuts are not helping consumers buy houses even at the attractive mortgage rates.
Chart courtesy of Colin Twiggs:
Best to all, Tim
Hi Clive, Re: thinking along same "lines"...
Yes, we are and your example and charts demonstrate it.
I would like to make one comment to any readers following this discussion. AIM is a trend following system; basically, buy the dips, sell the rips. As such, when there is a down trend, it is not going to give positive results unless it's inverted to follow a bear market trend. Or hedged with managed futures or options to manage losses. Bear market countertrend rallys are numerous and can be traded, but knowing that the primary trend is down. So, there is NO "holy grail" in any one method. Folks that persue systems advertised as such are not likely to enjoy advertised results in the real world of trading/investing. Markets evolve over time and there is always a random factor in forming the fractals that can cause directional traders distress.
The advantage of AIM is the cash/risk management. It doesn't allow one to go "all in" unless there's an extreme situation or it's overiden. I want to be quite upfront about the premise of our ideas so no one has expectations that are unrealistic. OK, enough said...
Your charting program has enough lines that are required. One extra would complete the set; another one more would give you the "bumper" margin of safety. Using the ladder inside a ladder idea takes the place of that on the larger time frame.
I like your formulas for the spreadsheet. What I'd like to do now, is to give you the ratios for the LRS and have you develop the spreadsheet into a simple one that could be shared for those interested in the idea. Keeping things open to innovation would be the prime motivation for doing so. So, mull things over a bit and drop me an e-mail if that's acceptable to you.
I think if we collaborate on this idea from each other's experience it will be rewarding to both of us. And the linear step idea might be best placed in the "mini" time frames to further divide the ladder down for short term trading ideas, but in the context of a short term LRS as was demonstrated yesterday in the charts I posted to protect against losses.
Best, Tim
Hi Ken,
The system I use is simple with only 4 inputs; some ma's, one indicator, the retracement/extension ruler, and the LRS. I think I read somewhere that humans can only deal with 7-9 inputs at one time. 4 works for me fine. I NEVER use stop loss orders in any trading/investing situation. That's like revealing your hand to your opponents in poker. When I'm ready to exit, I just do so without hesitation. I've found my trades either go as planned, or go to blazes in a hurry and that's where I exit to cut losses. No if's, and's, or but's...
Using a trend following system in this market is going to have many whipsaws on a short term basis. So, my discretionary method is based on looking for set ups and squeezes. If I don't see what I what, I don't trade. The "train" is always running, so another one will pass soon. ;)
AIM should be used in both up and down markets, I don't consider it a long only method. JMHO.
Best, Tim
Hi Clive, Re: Laddering II
Here's the EOD chart to the one I posted this morning. Note the changes to the LRS as the day passed. Since the market is fractal, you can think of this chart as a daily or weekly chart and project the same effect over a longer time span.
As the market expands or contracts, the ladder follows its movement readjusting the rungs, median, and upper/lower ranges. This dynamic capability is then inputted directly into the ladder spreadsheet for an ever optimum level of cash reserve. "Bumpers" can be added for a margin of safety at extremes.
User input is minimized if desired as the LRS refreshes itself every day, week, month.
Best, Tim
Hi Clive, Re: Short Term Trading...
Yes, I have a method but it is based upon indicator and pattern recognition. As such, it has about a 60/40 win rate in these volatile markets. It would require that you believe in a non random walk method. That might be a challenge, as to have an edge in the market means you have to have faith in it, even when the set ups go bad.
Part of the set ups for me now includes the LRS study. It requires much study and discipline to be a successful trader. Without that in these markets, the other participants can eat one up quickly. We're trading in highly charged and automated markets, so many methods are less successful because of that.
Best, Tim
Hi Ken, Re: Laddering...
Thanks Ken! I think so also. It takes the Lichello AIM method one step further as a non-emotional method of investing. Clive's done the pioneering for us and demonstrated his ladder and spreadsheets. So hat's off to him!
Best, Tim
Hi Clive, Re; Laddering
I think they will provide an accurate and dynamic way to provide guidance on the ladder ranges. They certainly prevented me from going into a "gap and trap" situation this morning. As you can see on the chart I posted, the market came in as the outer limits were reached on the LRS.
As for AmiBroker, if you have 5 lines, don't those double up for above/below the median line? IOW, 5 will get you 10.
As to the proportions, I don't want to release them quite yet until I do some review over a wider range of securities. I will be posting the weekly Wilshire Index chart as a general guide for all readers. I'm also thinking about designing a system where the charting inputs are dynamic into the laddering spreadsheet thus updating the spreadsheet in real time as to ladder levels, cash levels, securities valuation, and P/L. I need to think about this in greater detail to lay it all out and find the right charting software vendor to work with. Your advice on the ladder would be most appreciated as you have hands on experience with it. I'm sure we've just scratched the surface as to the possibilities of this method.
Best, Tim
Hi Clive, Re: Laddering
I have no doubt what you describe will work. One can divide the ladder rungs into various fractions and over time it will work. Adding the component of the proportioned lines into the mix provides a finer tuned ladder and the other benefits I've described.
If you feel your method is the best, then it will work for you as you believe in it. The investor/trader has to believe in their method as the best as it suites their ideas about the markets. I happen to prefer using the proportioned LRC as it hits the swing points and defines the ranges the best. That to me is most important as I like the precision. The computer draws the lines, I just follow along. ;)
Best, Tim
Hi Clive, Re: trading costs
I think the frequency of trading is best left to each individual's knowledge and risk appetite considering trading costs. You or I might trade more frequently, but a more patient investor may decide to go monthly and that's where the LRS can optimize a trading point decision.
So, this idea is a method, each individual can adapt it to his/her needs and time frame.
I've attached a very short term example to show volatility capture as that's what you like to do. The chart shows a LRS and a linear horizontal ladder for comparison. Enjoy!
Best, Tim
Hi Clive, Re: LRS
The LRS's can be made on any long term, monthly, intermediate, weekly, short term, daily - quarterly. Your suggestion of a ladder inside a ladder then would optimize the use of one's cash. While always having upside/downside targets and ranges to work with. This also gives the investor a time perspective of risk/reward and investment horizon if needed. The Big Picture is always available to view.
The advantages are numerous, as the market determines it's levels over time and short term noise is filtered out on the longer term LRS's. I like your ideas about the allocation of cash within each ladder. Once the levels are determined, then those are plugged into the spreadsheet to calculate the cash reserves as with the linear horizontal ladder. This is an advancement of the original idea that everyone can see and easily understand.
I'm asking folks that are layman to TA or math studies to see if they can grasp the idea. So far, the results are positive. Others here can express their comments if they understand the basic concepts.
Best, Tim
MM, Re: V-wave...
I believe it could be "normalized" into a 0-100 scale. To do so would require it be averaged with an assigned time period. I don't know whether that's a workable idea.
Tim
$DWC Linear Regression Study...
AIM users may find this chart of interest. Using a proportioned LRS, the trend is easily identified along with high/low ranges and intermediate swing points for buying/selling rebalancing. Overshoots past the normal distribution can occur, but an additional channel to catch them can be added. Ladder users such as myself can scale the ladder dynamically to the 19 ranges on the study. Ranges will extend up or down as the bull/bear trend continues so cash levels will always reflect an optimum, not a fixed level.
Since stock valuation models are subjective, numerous, and involve future estimates, the market can determine where tops/bottoms occur and it will reflect the majority of investors in the market at the time. The markets are ever adaptive due to the number of investors involved with them.
The bottoming pattern that was setting up in September was erased with the October/November sell offs causing further technical damage to the chart. I have a feeling this bottom will be unlike previous ones due to the severity of the sell off. I'll be posting this chart on a week end basis. You will see the bottoming patterns set up and eventually the slope of the median line start to flatten over time.
Alternation of Cycles; S&P 500 Targets...
Hi Clive,
Your simple trendline chart of the Dow shows nicely the principle of alternation of cycles. Up cycles are expansion, increased inflation, and rising productivity. Down cycles are contraction, decreasing inflation or deflation, lowered productivity caused by misapplication of capital, i.e., gov't intervention. One cycle always follows the other as the corrective to each period. My forecast of a flat ranging market is indicative of the alternation. Confirming information is coming from S&P research:
"S&P 500 YEAR-END TARGET CHANGED: S&P’s Investment Policy Committee reduced its year-end 2008 target for the S&P 500 to 850, indicating an expected full-year decline of 42% from the year-end 2007 closing level of 1468. We initiated a year-end 2009 target of 1025. This projected recovery of 21% for the coming calendar year is well within the average rise of 38% for the S&P 500 during the first year of a bull market since 1945."
I believe their 2009 forecast is optimistic, but plausible. The key will be how the gov't intervention is applied or misapplied. It's been well documented that the FED caused the Great Depression of the 1930's. This time they're misapplying monies by monetizing debt and that can lead to a "lost decade" situation as Japan has lived thru. Evidence of this is appearing daily as the financial stocks keep declining and the flight to safety resumes.
In your analysis, you need to build in a "worst case" scenario especially for an equity only and futures investor. As in any casino, there are many games to play. Play the games with the highest odds of success.
Best, Tim
Weakest Links
Courtesy of Colin Twiggs:
When the eventual rebound comes, pick the strongest countries for investments out of it. One can easily see where all our petro-dollars ended up! Way UP!!!
The Shadow Banking System
A brief blurb courtesy of Colin Twiggs:
"Commercial paper in issue contracted by roughly $800 billion before Fed intervention, but that is only the tip of the iceberg. A far bigger threat is the expected contraction of hedge fund investments by a similar amount, as investors flee to safer ground. The difference is that hedge funds are leveraged. If we assume a leverage ratio of 2.5 times, then a $800 billion contraction of investor funds would require a $2 trillion reduction in hedge fund assets."
This is most important, as the de-leveraging continues it will put increased supply of stocks on the market at fire sale prices. Added to this pressure, the usual tax-loss selling season coming ahead. There will likely be a huge supply/demand imbalance.
Remember, the second mouse gets the cheese. ;)
Where's the bottom??
All of the greybeards in crazytown, Wall street, admonish us that on one knows when a bottom appears. They claim it can't be found, it's impossible to spot and the markets move in ways no one can understand. Uh, huh... From the same folks that have caused the credit disaster and now have zero credibility as they seek funds to rebuild their enterprises.
Using two simple tools it doesn't appear to be so to me. The market will reveal when the right time to buy comes. Remember, the second mouse gets the cheese!
Decisive Day...
Hi everyone,
Well, we have new lows on many indexes including the Wilshire 5000. Since we have not moved higher on a cycle turn point, the lower lows will prolong our bear market. Since many were hoping for a rebound in the markets, the markets have disappointed them and if their stops are hit, it will add fuel to the downward move. New buyers might want to use countertrend rally's to raise cash and wait for the true bottom when it appears. Remember, in this game, the "second" mouse gets the cheese! Let the first mouse get caught in the trap... ;)
Best to all, Tim
Deflation
Hi Adam, Re Support levels,
Your logic is correct in an older world of trading where supply and demand were unique for each security in an index. In today's world, markets and individual securities are correlated to each other and the underlying trading in the index controls about 70% of an individual stocks price movement.
On any given day, watch the intraday pricing of your favorite stock against the S&P 500 or Dow. You will likely find as the index moves, your stock will respond unless there's a special situation where something significant happens good or bad in the stock.
In the morning, watch the S&P futures and the Euro markets. As the Euro markets move up and down, the S&P futures will move accordingly. With the advent of computerized trading and arbitrage, the correlations between assets are becoming more and more connected. It's even evident in the price of crude oil lately. As stocks go up, oil will follow or vice versa.
The net effect of all this is, on any given day everything will move up or down more or less. I think it's a terrible thing as there should be less correlation for diversity in asset classes to weather downturns in one or more groups as it was 10-15 years ago. Unfortunately, those days are gone.
Best, Tim
S&P 500 Support Levels
Hi Coach,
Well, let's see, since it's on the "right" side, is that American or Canadian?? ;) Yes, our leaders are "switching" sides in their "game" plan it seems. I fear they're hiding some unpleasant things in the "spiked shoe" closet and they're trying to prop the door from opening. Someday it will have to open, most likely after they've left the field! LOL
Heads Up!
Tomorrow will be an inflection point, as the VIX has broken out and it's poised to move higher. The Wilshire 5k is testing it's low again today and any further penetration will likely bring a lower low out of this consolidation pattern.
Ignore the TV gurus proclaiming the SPX percentage under the 200 day moving average is more than in the 1930's. That is because modern markets move faster than in 1929 so faster moves produce greater distances from moving averages. I love to see the media get so desparate!
Many folks in the 2x funds have positioned long for a bounce up. The market's job is to inflict as much pain on folks positioned on the wrong side of the boat. If there stops are hit, it will add fuel to the move lower especially during this options expiration week.
Tim
Representative Example...
Using the MSCI U.K. index, in a weekly time frame, my estimate of phi cubed works well here for both bull/bear markets. I reckon that about 13-15 ladder rungs would be required and in extraordinary times, say 18 to extend the "bumpers" out for black/white swan events.
Smaller fractals could be captured using smaller time frame charts, but a once a week approach would likely do well. When the trend shifts back up, then the ladder is "rescaled" to accommodate it, thus it is totally dynamic to whatever the consensus is to valuations or supply/demand.
Hi Clive, Re "Level Shares"...
OK, I'd like to do my buying/selling around the major levels as the probabilities of hitting those targets are great and giving up captured gains or conversely picking up greater bargains would be the motivation for me personally.
I'm thinking about the calculator/spreadsheet. It's crystallizing in my head with your formula. ;)
BTW, Birinyi & Assoc. has just come out with the S&P 500 trailing P/E, 19.19 & 12 month forward est. of 11.60. I suspect the forward est. will continue to shrink from what I've been reading today. Our Dow Jones media is pitching heavily to retail investors to pick up the slack left by the distribution of institutional investors. Always good to see the media getting desperate! I suspect we'll be seeing single digit P/E's someday.
Best, Tim
Hi Clive,
Got it! I follow your formula perfectly. Thanks...
Best, Tim
Hi Clive,
Thanks for your chart of the FTSE; I'm still looking for the right index symbol for my charting program for that index as I'm thinking more and more into utilizing int'l markets as I believe they will recover quicker than the U.S. when all the deleveraging is finished. I'll look for the U.S. equivalent ETF as a proxy.
I have no problem sharing the calculator/spreadsheet once developed. You've shared your's here and the ladder method and that was my inspiration for the tweak. The chart you've posted is indeed too "busy" and that's why I suggested having ladder rungs at major expansion/retracement levels otherwise too much trading costs begin to reduce returns.
As to the time spent, it takes me very little time to draw up the projections on a chart. Roughly about 5 minutes/tradeable. This is after lots of experience in doing it and having a very good grasp on the ratios that might come up as major levels. That said, anyone can learn it and when mastered it will be a short process.
I'm glad you added the ATR as it's nice to see the volatility in price ranges over the time span you've posted. Bespoke did a great chart on 10 week price change for the S&P 500 from 1929 to the present:
http://bespokeinvest.typepad.com/bespoke/2008/11/50-day-average-daily-sp-500-change-at-326.html
It really hi-lites the severity of our current economic malaise. I think most folks haven't grasped the scope of the problems. BTW, always use arithmetic scaling when making projection charts. That's a must...
"I opine that stocks price moves are to a large extent random, but equally are bounded with certain limits of mass greed/mass fear. Structuring your Ladder boundaries to historic levels of fear/greed, perhaps as depicted by dividend yield (or some other time independent measure) will help ensure that your ladder remains active across time, rather than encountering periods of prices being outside of the ladders range."
Yes, intraday and daily prices changes are for the most part random driven by news events, earnings reports, etc, but over a longer time frame the trend of the market reveals the collective mind either up, flat, or down until the concensus view changes. That's why in looking at charts, their are patterns that might complete or might not. What's driving the market is order flow from larger groups that either put on or take off positions and their doing so may have no correlation with anything technical or fundamental. It's just the normal random nature of the market in short time periods from the order flow.
The ladder as I envision it, will reflect the historical ranges, but with "bumpers" at the extremes to allow for worst/best case black swan events. Since we know markets overshoot both ways, that has to be built into the modeling. Fortunately, those overshoots also have a math component to them and can be built in to the ladder.
Since the ladder and the expansion/retracement levels are likely targets, not predictors, with the ranges built on natural ratios, they will not change unless human behaviours change and if that happens, then it can be rescaled to the new parameters. One's personally preference then is to fine tune to those natural levels or just divide the rungs by percentage or fixed steps. I just prefer the former and you may prefer the latter. ;)
Best regards, Tim
Hi Clive, RE Ladder
Thanks for your comments and practical "hands on" recommendations. Your linear steps actually happen to be a "natural" ratio of 1/6. ;)
I'm giving much thought to using your hedging style as part of the investment plan. Also, devising a spreadsheet, or simple calculator, that is a template rather than a fixed design so individual levels can be inputted with specific levels of cash as the output. As I've shown on your board, each tradeable moves along to a slightly different "beat."
One could further subdivide the levels, but that would end up with too much trading. The major levels are the ones to be concerned about and moving past them up or down is the way to view it I think.
At the present time, laddering to the upside is desirable. I have a good handle on an extreme downside move and if and when that's acheived, then the upside projections are easily nailed down and the ladder recentered a bit.
BTW, I'm looking for world markets to recover quicker with larger gains than the U.S. The U.K. recovered from the depression period much faster than the U.S., so an international asset allocation is desirable.
Best, Tim
Nothing New Under the Sun...
Another good example of laddering for the current market.
How low will it go? God only knows, and he's not telling us! ;)
Tim
A Look Back, Way Back...
Back to the 1929 credit bubble that repeats today on a much grander scale and global scope. New bull trends are born on low valuations and volatility. Enjoy the look back and note how the '29 market was easily "laddered."
Tim
Re: VIX Peaks
Hi Grabber the answer is simple; unprecedented. Since our current economic state is a once in 80 year event, the VIX is reflecting circumstances that were last faced in the 1930's.
The chart shows the history from 1999 to today; note the bottom line beneath today's closing value. That value was at the bottom of the March 2003 low. You can see how quickly the index came in after that final peak.
I've added a simple 52 week oscillator to show the mean deviation variances with the 100-0-100 being a rough trading range. At the latest high peak, that was at the 643 mean deviation. The value on the oscillator, 52.52 was the reading during 3/10/03.
Best, Tim
Corresponding VIX Chart
VIX leads the way for range swings; note the strong correlation between the 2 charts.
Hi Tom, RE "Wild Ride"
This chart of the Wilshire 5k shows the range of the index for a 25 day period. Currently at 520 points/day. The VIX is rising and if it breaks out, expect increased downside pressure.
Volatility is just another word for uncertainty. As uncertainty increases, so does volatility and point ranges for stocks. Because of the uncertainty, the risk premium for stocks needs to rise making them more attractive than other asset classes.
Best, Tim
Hi Clive, RE Laddering III
Here's an example of applying the ladder both in uptrending and flat markets using a real stock, Berkshire Hathaway:
Centralising the ladder around the median trendline of the uptrend with the ladder ends adjusted to say 85% of the upper and lower trendlines of the uptrend. Having an additional cushion of 15% for overshoots of either side. Using this method as the trend changes from up to flat (bold green & black lines) then one is alerted to remove the stock from your warehouse and find a new issue, or if prepared to ride the stock down, perhaps to that orange line, then one constructs a new median to recentralize the ladder with the center on the black line. Personally, I would remove the merchandise from my warehouse if the trend shifted downwards for an individual stock.
This method could be applied to all tradeables including, bonds, commodities, indexes, ETF's. The upper and lower trendlines are drawn off price history or standard deviation channels as one prefers. With a linear method, one always has an idea of the trend as it shifts up, flat, or down and any angles in between.
Best, Tim
When there is a lack of honor in government,
the morals of the whole people are poisoned.
~ Herbert Hoover, 31st President of the United States (1929-1933)