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Although I generally agree with the results of Russ's study, and Norm's
conclusion that it is better to take your losses on the day and to
carry your winning positions overnight, I think Russ's study would
be more interesting and compelling, if Russ looked at the profits made,
assuming, say 100% accuracy on calling the direction each day. So
if tomorrow is up, then buy, if tomorrow is down (open to close)
then sell). The study becomes more interesting if you do some sort
of Monte Carlo simulation, where first you exclude the outliers
(the +/- 5% move days on the S&P), and then assume a certain level
of accuracy in predicting the next day's direction: 100, 95, 90, etc.
You can do this with a random nubmer generator, if it returns a
number in the range 0 .. 1.0, for example, then 90% accuracy migth
be simulated, by going the correct direction if the random number
is less than or equal to 0.90 .... by including commish and
slippage, you'd be able to see what the accuracy would've had
to have been to make money as a daytrader, or to beat buy/hold.
Also, to be realistic, if you're looking at something like the S&P, I
think you'd need to scale the margins and slippage to be representative
at the current price/volatility level, and should look at percentage
gains/losses on the day, not net number of points.
Finally, you'd have to include some sort of increase level of positions
as profits are made ... this is the attraction of leveraged trading ...
to essentially compound the daily short term gains into something a lot
bigger than buy/hold. Yes, this works both ways, however, I see that
as the attraction of trading vs. buy/hold.
And to be more realistic, there'd have to be some sort of stop-loss
imposed. I don't know many daytraders that don't have some real
or mental stop in place. (basically it isn't easy to do a fair
simulation)
While I'm rambling .... Sweeney's books/articles on Max. Adverse
Excursion, show that as a general rule, winning trades start out
winners more/less from the outset, and then keep winning. The
losers, lose at first, and seldom come back the way you'd like
them to. Wish I didn't keep parying for that lesson ....
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| Gary Funck, Intrepid Technology, gary@xxxxxxxxxxxx, (650) 964-8135
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