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Hi,
The new year is often seen as a time for reflection - however
uncomfortable that thought might be for many.
For anyone who searches for 'dow open high low close' on Google will find
at Investors' Galleria 80 years of the DOW closing price.
There are probably other sources of free data.
There are over 20,000 daily closes in this file - enough for statistical
significance for many tests.
If, with a simple set of Excel tests, you investigate this data, you will
find many sources of market behaviour that can help put the odds in your
favour. There are as many ways to put the odds in your favour
as there are perceptions - perhaps an infinite number of
viewpoints.
I hope to intrigue you with just one such perception of market
behaviour.
Without performing anything sophisticated such as de-trending the data or
worrying about the size of any move, a simple analysis will show
that:
Given one days move in one direction the probability of a continuation in
same direction is about 55% - victory to the trend followers.
Given two closes in the same direction, the probability of continuation
is about 29% - victory to the faders.
A fuller table is:
After a directional move
of
Probability of Continuation
1 days
duration 55%
2 days
duration 29%
3 days
duration
15%
4 days
duration
8%
5 days
duration
4%
6 days
duration
2%
...
...
13 or more
days
0.02%
Statisticians will recognise, despite the long-term 'trend', the
similarity of these results to random data, probability starting at 50%
and halving each time.
I fully accept, that this is a simplistic analysis because:
- other
markets might behave differently,
- the
data has not been de-trended,
- the
size of any move has been ignored,
- a
'trend' could suffer a small retracement and then continue,
- ....
However, apparently 98% of traders try and follow a trend once
established and it is said 95% of traders lose money.
These statistics must give pause for thought.
The crowd, the majority, the loudest voices, the stylish people, the
fashion followers, all seem to be trend followers, but most seem to
lose. God forbid, but maybe the crowd have
missed something.
Maybe there is another way. But can I go against
the crowd? Can I be part of the minority that
makes money? Can I offer service rather seek
service? Can I resist all those temptations for 'easy
money'? Can I be different? Can
I cope with no longer sharing the perceptions of all those other
traders?
But then maybe I am closed to new ideas anyway and must continue to go
along with the majority forever. After all some of the
trend followers do make money - surely it cannot be that hard, even with
the odds heavily against me.
I do not need the odds in my favour - I will be one of the rare trend
followers who make money.
Besides how much more challenging and rewarding to make money being a
trend follower with the odds stacked so heavily against
me. After all I love playing one armed
bandits at Las Vegas - and the odds are stacked against me
there. And some people do go away winners from Las
Vegas.
Regards, Ric.
www.traderscalm.com
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