Momentum, Macro, pattern recognition
Contributor Since 2012
To most people both on and off Wall Street markets remain an enigma. Look no further than the performance of your average hedge fund in 2015. According to the Barclay Hedge Fund Index the average performance was a dismal +0.04% -- after fees that is a negative return.
To quote one long-time Wall Streeter, "PTJ and the boys haven't made money n years" - PTJ is short-hand for Paul Tudor Jones, a legendary hedge fund trader who produced enviable returns for decades.
Likewise all the ex-exchange floor traders from Chicago are throwing in the towel because they have it hard-wired into their heads that they can't compete with computers. While wannabee traders let the computers get in the way of seeing the market, and use the excuse "we can't compete with Wall Street". Both are dead wrong assumptions that we hope stay in place forever.
First and foremost directional traders don't compete with computers. The computer is just a tool for analyzing markets and executing trading strategies. If you don't have a proven winning strategy already the computer is not going to help, it's going to be a distraction. This brings up the issue of allowing a computer to get in your way. Again, if you do not already have a proving winning strategy, you can program applications all you want but you won't come out on the winning side till you program a winning formula. Even an ex-luddite like me understands "garbage in , garbage out".
From a mathematical perspective markets are as predictable as they have ever been and the proof is in the ratios of the market extensions - think impulse movement -- and the retracements - counter-trend movements. They have not changed in 50 years and very likely more like hundreds of years. This is a simple truism that has taken us upwards of 25,000 hours to observe but which can be demonstrated in the following benchmark spreadsheet - see below.
A benchmark is a record - usually a spreadsheet -- that shows the history of a method's trades. It provides an abundance of useful information including that all important win/loss percentage and the risk: reward ratio and is the starting block for improving on your trading performance. It is your end-game when it comes to market analysis and trading, and tells you if you're ready to risk your money in the market.
The method highlighted breaks the market down into time frames, ex: 25 to 30-days, 50 to 60-days, and 120-days, identifies whether that time frame - pattern - is bullish or bearish, and then takes a position inline with that pattern by buying a price dip, or selling a price rally following a test of a predetermined retracement level . Essentially we observe while the majority of market participants take their positions, establishing the predominate direction, i.e.: pattern, then wait for a counter-trend correction just beyond the risk tolerance level of the lesser funded traders, and enter trades after the "weaker hands" have been flushed. It is safe to say this is how markets move. This simple method also has the advantage of relying on just one input: market generated data - high, low, and closing prices only.
It isn't rocket science. And has the advantage of being too simplified for Wall Street - an industry that employs armies of doctorates and relies on sophisticated artificial intelligence is not going in for "buying dips in uptrends" and "selling rallies in down-trends". Particularly when it doesn't trade frequently or generate fees, and all you need is a simple chart with no indicators. Likewise it doesn't appeal to Main Street because it's opinion-free, involves lots of patience, and involves taking orders not giving them.
After spending tens of thousands of hours unlearning the lessons gleaned from having spent over 20 years working on a trading floor and another 10 working on the banking/brokerage sell side, I have realized the perfection of the market comes from doing the same thing over and over again with just enough variance to the throw the majority of watchers off the scent.
Jay Norris wrote Mastering Trade Selection & Management, McGraw-Hill, 2011, and teaches the art of trading at Trading-U.com