exp system

[exp]

well, some of my assumptions about the market behavior and optimal trading strategy are proving to be a bit suspect at closer inspection...

it appears that the sentiment/crowd psychology aspect of markets is proving rather difficult to quantify even using the best t/a or math/stat...

the specific major problem i encountered is determining major market tops/bottoms...i have carefully analyzed NDX and SPX charts for 1997-2003 and i have not found any reliable way to determine tops and bottom until well after the fact (such as using weekly charts or longer term moving averages on daily charts)...this is of course well known to veteran market watchers and i myself suspected this as well...

what is a NOVEL insight to me is that i found it difficult to effectively swing trade BOTH long and short based on chart behavior...specifically, one may have to choose the dominant mode of swing trading...either long or short...this in order to avoid being excessively whipsawed...in other words maximum gains are simply not possible on both long and short side due to the fact that the tops/bottoms have to either be anticipated or acted on after the fact...

apparently, the preferable mode of swing trading appears to be trading LONG...this may explain why in bear markets short sellers apparently do not achieve gains similar to those long in bull markets of the same duration...

the two reasons for this long preference are:
(1) even in a declining bear market of 2000-2002 swing gains on the long side equal swing gains on the short side due to the fact that, say, a 50% drop followed by a 50% gain still leaves the market 25% below the starting point
(2) sudden (1-day) market moves tend to be larger in magnitude in the up direction than in the down direction and also longer-term moves down appear to have more zigzags than longer-term moves up...all this makes it emotionally more difficult to hold on to short positions, see the NDX chart:
http://stockcharts.com/def/servlet/SC.web?c=$NDX,uu[r,a]dallynay[d19970101,20030518][pf]<i&pr....

the above observations, even if true, do not mean that i expect a bull market in the future or that i philosophically believe that trading long is the right way...rather, the math (and the psychology of trading) seems to be compelling in suggesting that disciplined swing trading both ways but with a preference for the long side may be a better strategy even in a bear market...

despite these observations it is clear than capital preservation remains key for those in long side only mutual funds as large losses are doubly difficult to recoup (a 50% loss requires a 100% gain to recoup it)

i should add here that these observations do not mean that effective successful trading with 100%+ annual gains is not possible...rather one has to accept the fact that only a certain percentage of market moves can be correctly anticipated and traded with resulting gains...