User 205411

Measure, Don't Model: The Forest and the Trees

Personally, I think that trading based on behavioral indicators is a pretty good idea ... until it isn't. Point being, people who traded on contrary opinion last year, made a lot of money, till late-September. Then, when the market started tanking, investors panicked. If you were a contrarian and took that panicas a signal to be bullish in the first week of October, you would have gotten killed.

So I'm going to offer a little bit more advice than the question asked. Because it's what kept me profitable in 2008 even though I did nothing but take bullish and non-directional option trades all year long. Here's what's key, at least from a trading perspective (not an investment perspective). You can be wrong on a huge number of trades and right on a few, and still make money, as long as when you're wrong, your allocation to those losers is small and your allocation to the winners is big.

Now what's the solution to that? I don't have the answer for this forum. But I'll just say this. We had larger allocations to trades through the entire year till September, then scaled back a lot, then picked back up on the allocation in December. This month, we've scaled back again. Had we gone with a persistent allocation throughout the year, we would have gotten hammered in September, October and November.

In my mind, you don't need any directional "indicators" to make money in the market, at least when you're trading. [Investing is another matter.] Indicators certainly help. And I use them. But what I've found that is far more critical is that you have proper allocation schemes. That's where the real difference comes from.

I know I went on a tangent there. So I hope I answered your question.

-- Don


On Jan 10 12:35 AM Gisi wrote:

> Don- just out of curiosity, what is your view on trading based on
> behavioral indicators?
>
> My personal belief is that you can never, ever predict the market
> so why waste your time trying to do that? You CAN, however, always
> predict how people will react to a situation. Humans just don't change.
> I recall in one of your comments you mentioned extreme, unpredictable
> events (something with the ASCO convention). An example like that
> could be explained by investor overconfidence in the company for
> finding a breakthrough cure in cancer (otherwise why would they hold
> the conference to begin with?) Please keep in I'm taking a pretty
> general view here, just to get my point across.
>
> Let me know. As someone who also doesn't believe in statistics, I'm
> really curious about what you think about behavioral finance trading...

Consumer Sentiment as a Contrarian Predictor

The chart above shows the UM Sentiment number with recessions, but nobody trades recessions. We trade markets. Here is a link to a chart that shows the entire history of the UM number plotted with the S&P 500.

www.donfishback.com/bl.../