A trading system should have several components that the January Barometer does not. A trading system can be fundamental or technical. A trading system that has little sound or fundamental factor as its central hypothesis is nothing more than a guess. Let me ask you a question. If you flipped a coin 20 times and the results were 14 heads and 6 tails, do you have a system for flipping coins? When you stop laughing, we can get serious.
A sound trading system has a specific entry point and specific exit point if another event occurs. For argument sake, you can say that if the month of January was a down month, you entry a short position February 1 of that year and exit December 31 of the same year. That is what the almanacs and pundits are implying with the month January effect trading system.
Let me ask you a question. If you flipped a coin 20 times and the results were 14 heads and 6 tails, do you have a system for flipping coins? When you stop laughing, we can get serious.
There no trading system works all the time, but there are many trading systems that work to produce more profits than losses. These trading system have an entry rule and an exit rule. Let’s take the 200 day moving average system. You would enter a Buy or Long position on a close of the stock, index, or ETF when the price closed above the 200 day moving average. You would then exit and take a new Short position on a close below the 200 day moving average. The hypothesis is that the particular index or ETF will trend with the 200 day moving average serving a rule to determine supply and demand buying and selling by investors. It doesn’t predict time or direction as does the January Barometer. It doesn’t even predict how many times it will change positions during a year. The rule change acts as a stop loss, another critical aspect that does not make the January Barometer a trading system.
In 2009, the market finished the month down roughly 9 percent but ended the year up a 23 percent or a 33% loss using the 2009 January Barometer as a trading system. If you have stayed the course in 2009 and had a 33% loss, are you going to try it again this year?
Will the January Barometer work as a trading system in 2010, I don’t know today. I do believe that there are many trading systems that I would place real money using before I use the January Barometer.
Is the January Barometer a trading system? I will let you answer that for yourself.
Our Daily Market Timing Trading System Newsletter includes tracking of the 200 day moving average system, not the January Barometer.
To learn more about trading system and research on trading systems, visit www.seleznovcapitaladvisors.com
Disclosure: Seleznov Capital Advisors maintains Long and Short positions in a variety of indexes, but no stock positions.