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FXstreet.com
The cost of common market wisdom
My advice for new traders is to question,
question, question everything they read and hear about markets. Many times,
common wisdom is uncommonly misleading.
As we've moved toward bull market highs in the
large cap indices, for example, we've heard that the "trend" is up and that long
positions are therefore warranted.
Well, let's do a simple analysis by breaking the
market since 2004 (N = 682 trading days) into three categories: 1) occasions in
which SPY is up on the day, up on the week (five day period), and up on the
month (20 day period); 2) mixed occasions in which SPY is a combination of
up/down over the three periods; 3) occasions in which SPY is down on the day,
down on the week, and down on the month.
When we've been up over all three time frames (N
= 192), the next ten days in SPY have averaged a loss of -.20% (99 up, 93
down). When we've been mixed over the time frames (N = 374), the next ten days
in SPY have averaged a gain of .28% (223 up, 151 down). When, however, we've
been down on all three time frames, the next ten days in SPY have averaged a
gain of .95% (77 up, 40 down).
The common wisdom--and the common human
tendency--to buy when the market is strong and sell when it's weak would have
lost a trader a significant amount of money.
So, to paraphrase literary critic Dorothy Parker,
here's my advice: Next time a market analyst/guru waxes poetic about buying the
market because the market is strong, don't toss his advice aside lightly.
Hurl it with great force.
Brett N. Steenbarger, Ph.D. is
Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY
Upstate Medical University in Syracuse, NY and author of
The Psychology of Trading (Wiley, 2003). As Director of Trader
Development for Kingstree Trading, LLC in Chicago, he has mentored numerous
professional traders and coordinated a training program for traders. An active
trader of the stock indexes, Brett utilizes statistically-based pattern
recognition for intraday trading. Brett does not offer commercial services to
traders, but maintains an archive of articles and a trading blog at
www.brettsteenbarger.com and a
blog of market analytics at
www.traderfeed.blogspot.com. His book, Enhancing Trader Performance,
is due for publication this fall (Wiley).
