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At 09:34 AM 10/13/98 -0500, Mark Brown wrote:
>
>>What I'm trying to get across is the following : If you can determine the
>>trend then its too late to do you any good. >>
At 11:05 PM -0400 10/13/98, CRLeBeau@xxxxxxx wrote:
>
>I have to politely disagree. Trend following does work. The reason it works
>is that the distribution of prices is not a typical bell shaped curve as would
>be expected. The curve is bell shaped with thick tails. This means that once
>a price starts moving in a direction there is more than random probability it
>will continue in that direction. There have been many studies that show there
>is serial correlation in futures prices. Believe it or not, after an uptick
>the odds slightly favor another uptick over a downtick and after several
>upticks another uptick is even more likely.
>
>Now trying to trade against trends and play around in the "noise" as I like to
>call it is another matter. The odds are extremely poor because it is
>difficult to get a favorable risk to reward ratio working in our favor.
>Losses need to be small so they are the same regardless of our approach and
>nontrending markets can produce only small profits if any. Small profits plus
>small losses plus transaction costs equals no advantage to the trader.
>
>On the other hand trend following offers the potential of big profits which
>can offset many small losses. Many trend followers do very nicely with far
>less than 50% winning trades. Counter trend traders need to do much better
>than 50% winners and that takes great skill in my opinion.
>
>If you or anyone else can make money trading against these odds you are truely
>a rare and gifted trader. I assume you are very succesful at what you do but I
>wouldn't recommend this style of trading to anyone less talented. That would
>be bad advice.
>
I clear difference of opinion. But I think it depends upon what your
objective is.
It is well known that some markets tend to move back and forth between a
support and resistance levels a lot of the time. Look at a recent 45 min.
bar chart of the S&P as an example. Look at three different objectives for
trading this price signal:
> If you are trading futures, if you wait until after a bottom for
an uptrend to be established, it is hard to get filled and
slippage is high. So you may miss much of the move. So, as Mark
says, if you have a good way to estimate where the turn will come,
(and if you can react quickly if it doesn't turn), then buying
against the end of the previous trend could be the best strategy.
> If you trade options, as I have been recently, the premiums on
calls is much less as the price is falling near the end of the
down trend. If you wait for the new uptrend to be established,
the premiums increase substantially. So trading against the
trend can make sense in this case.
> But if you are trading Spyders (S&P Depository Receipts),
getting fills is not a problem so waiting for the new trend
to be in place may well be the best strategy. Chuck is correct
that the probabilities very clearly favor a trend continuing
once it is in place.
Similarly, position trading most stocks against the trend would be suicide.
Once the trend of a stock starts up or down on a daily or weekly chart, it
is very likely to continue in the same direction for quite a while. The
basis of the success of most of the "momentum" fund managers is based upon
this principle.
Bob Fulks
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