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I see your point and partially agree, but I look at it this way.
In regard to buy and hold, there are two things that need considering.
One is taxes. Traders pay income tax on ordinary income, and buy &
hold people pay taxes on capital gains. Not everyone trades in a tax
free account.
Some people justify trading by saying they're controlling risk. Using
a good asset allocation strategy controls risk far better than any
trading method and has shown excellent long term consistent returns.
Anyone not understanding the risk/reward ratio in asset allocation
should probably start with The Four Pillars of Investing by William
Bernstein.
I have a portfolio based an asset allocation strategy, and it's done
extremely well over the years I've used it. For example the drawdowns
in 2001 and 2002 were very, very small, in the 1 or 2% range, and
since 2003 the total portfolio has more than doubled.
I use the results from that asset allocation method as the buy and
hold return I have to beat. If I can't make more trading AFTER TAX,
why trade at all?
Then of course there's the consistency issue. The asset allocation
strategy performed more consistently over the last ten years than any
trading system I've seen with the exception of the one I wrote about
in Roy's newsletter. Maybe there are others that are really
consistent. I just haven't seen them.
I certainly agree that any good trend trading system will avoid years
like 2001 and 2002, or if it's really special it will make money
anyway. The trading rules in my system do exactly that.
I've also tested my system using random entries with my exits, and
also with my entries and fixed exits, like profit percent and days in
trade.
The two things I checked for was did my system beat the random entry
method, and how did the random entry method do yearly compared to my
system.
Using buy and hold doesn't mean not controlling for risk and
drawdowns. The asset allocation model I mentioned controls for risk
and has very low drawdowns. I'm not going to use a trading system that
gives me worse results. I'm in this to make money, so for me I
definitely want it to beat the buy and hold method I would use.
I agree that some traders compare their results to an index, which is
another comparison that is good for overall return, but as you said,
not for controlling risk. It's a comparison that should be made, but
not one I'm going to use as a deciding point on adopting a system.
Super
--- In equismetastock@xxxxxxxxxxxxxxx, "csmp_pp" <paulyes@xxx> wrote:
>
> hey super,
>
> Even tough overall u are extremely right about ADX, indicators, gurus
> and all...still there is something in ur judgement that is wrong and
> that is "beats buy and hold". A valid trading strategy tested on a
> portofolio of securities should keep u out of watter (thats loosing
> very little or just breakeven) when the market index makes huge
> drawdowns like on 2001 and 2002 and beatting the index the rest of
> time and it should never be compared with buy and hold because if u
> do that u compare apples with...tomatoes. Such a strategy would give
> a anuallized compounded interest rate of over 20% wich is more than
> the return of the majority of mutual funds. Now if this strategy has
> decent drawdowns (about half of the anuallized compounded interest
> rate) then it should be considered a valid trading strategy and from
> my experience not many people have something like that. Further on
> for higher results (of course with higher risks) u could trade on
> margin or use different money management, this will yield different
> returns, also the number of years will yield different returns and so
> on... there are a large numbers of variables that could lead u to 40-
> 50% anuallized compounded interest rate. Over the years i saw a lot
> of people wich are pure gamblers and they not even know or understand
> that. On short buy and hold has nothing to do with trading and it
> should never be compared with a trading strategy or the other way
> around.
>
> *PP :)
>
> --- In equismetastock@xxxxxxxxxxxxxxx, superfragalist <no_reply@>
> wrote:
> >
> > The ADX is so so like all indicators.
> >
> > When the market is going up 55% to 80% of all stocks are rising. If
> a
> > random number generator were used to pick stocks for your portfolio,
> > the number of winners in your portfolio should match the overall
> > percentage of stocks that have risen since the portfolio was picked.
> >
> > Well, you don't like random number generators. You can not handle
> the
> > psychological aspects of picking stocks randomly. It just doesn't
> make
> > sense to you that it could work.
> >
> > So you develop a trading system using the ADX, or any other
> indicator
> > or combination of indicators. Wow, it beats buy and hold. Really.
> >
> > Here are a few questions to ask.
> >
> > During what kind of markets does it beat buy and hold. Downtrends?
> > Uptrends? No trends?
> >
> > Is the system going to destroy your peace and sanity when it starts
> > it's huge drawdowns like it would have in 2001 and 2002
> >
> > Does it pick more winners than a random number system would? Does it
> > make more profit than a random number system?
> >
> > In what kinds of markets does it beat a random number system, if it
> > does at all.
> >
> > How does it do on a yearly basis over long periods of time. Forget
> the
> > overall performance. How many times out of the last X years would
> you
> > have quit trading it because you couldn't stand to lose like that.
> >
> > Now do any of the books, articles and websites touting the ADX or
> any
> > other indicator answer those questions. NO! Why not!
> >
> > Well, here is their answer.
> >
> > This fabulous indicator was developed by one of the world's greatest
> > traders and chart analyzers. It doesn't need to be tested because if
> > it comes from our guru, you know it's good just because he said it
> > was. He's written countless books and given lectures all over the
> > world. Forget the test results, you have our fabulous guru's word
> for it.
> >
> > Yeah, but I would still like to have my quesions answered.
> >
> > Okay, here's out answer. Since everyone uses indicators differently;
> > everyone has different trading skills; everyone trades a different
> > market, test results would be meaningless, so we just don't publish
> > them. Even if we did, no one would believe how good this is and how
> > rich it has made our famous guru. Don't you want to be rich?
> >
> > Here's my answer.
> >
> > Show me one system with the ADX, or any other indicator or
> combination
> > of indicators, that has beaten buy and hold, is consistent year to
> > year, beats a random number system and has rational drawdowns. Show
> me
> > just one. Put a disclaimer on it telling me the blah, blah, blah and
> > I'll test it myself. If it does all those things, then I'm going to
> > take a serious look at the indicator that did all of that.
> >
> > I'm going to read all of your guru's books and kiss your guru's
> ass.
> >
> > Then I'll find ways to incorporate this indicator into my style of
> > trading, and I'll develop a system that suits me now that you've
> shown
> > me an indicator, or trading logic, that I can use as the base for my
> > own strategy.
> >
> > Don't take my word for it. Do the tests I've suggested with the ADX
> in
> > any combination you choose and get back to me with the results.
> >
> > It's fairly easy to beat buy and hold. It's very difficult to
> achieve
> > consistency and to beat a random number trading system in a specific
> > market.
> >
> > Super
> >
> >
> >
> >
> >
> > --- In equismetastock@xxxxxxxxxxxxxxx, "Paul Harris" <paul_vicmar@>
> > wrote:
> > >
> > > Have recently been looking at Wilders Directional movement system
> and
> > > reading about it on the web.
> > > What are people´s experience using this sytem? How effective is
> it in
> > > identifying trends etc...
> > >
> > > http://www.surefire-trading.com/tsl/tl/tl-71.html - ADX and RSI
> > > http://www.renegadetrader.com/ - Choosing stocks
> > >
> > > Thanxs in advance
> > >
> > > PAUL
> > >
> >
>
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