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Directional Trading

October 2, 2013
31 people like this post.

Once in a while I select a comment from the blog that I think all bloggers will gain benefit from. This week I have chosen a comment left by Don.

Last time I looked SPA3 didn’t make any investments in falling markets thereby missing out on profit opportunity.

Response to comment by Don:

Let’s firstly focus on the term ‘profit opportunity’. The market provides every single one of us with the opportunity to make a profit. There is endless opportunity to profit and endless instruments to make a profit with; whether it’s long or short stocks, CFD’s, Futures, FX, ETF’s, ETO’s or Bonds (just to name the major instruments). Add in the number of international markets and individual securities that you can trade with each of these instruments and the ‘profit opportunity’ is endless. So the issue is not ‘profit opportunity’ it is the skill set required to make a profit.

Directional trading far exceeds the skill set and psychology of the majority of retail investors. Those that do attempt to trade in both long and short directions quickly learn that rising markets trend far slower than falling markets and that short selling requires much more effort and is far more active than going long. Leverage is often a requirement of short selling and this too increases the skill set, risks and mindset required to make a profit.

Now let me focus on the term ‘missing out’. Missing out is a compulsive concern or fear that one might miss out on an opportunity (just like you have stated). The vast majority of retail traders and investors suffer from this fear of missing out (FOMO) AFTER the event. They are able to identify perfect trade set-ups and wonderful profit opportunities AFTER they have occurred and they spend an enormous amount of time and energy agonizing over what they SHOULD have done, if ONLY they had “seen it coming”. The truth is that these events often occur out of the blue and counter to the prevailing trend and it’s only a unique type of trader than can run long and short positions and still profit from the market.  So it’s not your everyday trader who we are talking about here. It’s a sophisticated and skilled individual who has spent years refining their analysis skills, mindset and risk tolerance.

As you have rightly identified, SPA3 is a long only equity system that aspires to be 100% invested in a SPA3 Low market period and upon a SPA3 High market signal, SPA3 users move 100% of their trading capital from the market and into cash. So SPA3 allows investors to participant during times when the market is conducive to making profits and then protects capital when it is not!

The returns of the SPA3 Public Portfolios and of our exhaustive historical research and portfolio simulation demonstrate that the SPA3 long equities and cash strategy WORKS and hugely out-performs our two focus markets – All Ordinaries and NASDAQ Composite.

The SPA3 ASX Public Portfolio has demonstrated a return of 17.92% compounded per annum from the 25th January, 2001 to the 1st October, 2013 compared to the All Ordinaries over the same period which has returned 3.72% compounded per annum. And the SPA3, Real Money NASDAQ portfolio has returned 52.18% from 14th January 2013 to the 1st October 2013 compared to the NASDAQ Composite over the same period which has returned 22.73%.

There are a number of core motivations for never introducing a dedicated short selling approach to SPA3 and they include:

  • The market has an upward bias
  • The demographic of a SPA3 user
  • The risk tolerance level of the overwhelming majority of SPA3 users
  • The skill level required to trade leverage and multi directional products
  • The advanced psychology and mindset that is required to trade leveraged products

The core benefit of moving a portfolio to cash during times of uncertainty (momentum of the market turns downward or volatility increases) is that CASH removes the volatility, smoothes the equity curve and decreases portfolio drawdown.  This makes a strategy far simpler to trade and protects or preserves the underlying capital base. For the trader or investor it allows them to be able to sleep well at night knowing that if the conditions of the market change that they have a strategy that is designed to react to the events of the market.

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31 people like this post.

Comments

  • David says:

    Bravo Gary. I would stress that ‘getting in’ to the market as soon as it reverts to “low risk’ after a ‘high risk’ SPA signal period is a real key to capturing the fastest up moves in this age of ever increasing volatility.

  • Rennus Crossley says:

    Gary

    Very well said hopefully “Don” will get it.

  • Malcolm says:

    Oh, how I wish with all my hindsight that I had gone to cash and not CRASH in previous years. I have learnt my lesson and fully endorse going to cash for long only participants.
    I am learning to trust the statistics and testing Garry has presented

  • Don Coldicutt says:

    As Gary stated there is ETF’s, ETO’s, I used the U.S, Short S&P 500 Proshares (SH) to
    ride the market all the way down from the top after the housing bubble collapsed,
    I had already sold all my shares and used most of I my cash to buy (SH).
    that only took about 5 min., that is not hard is it?.

    As Gary rightly stated that rising markets trend far slower than falling markets,
    Therefore you can make a lot of money in a short time in a falling market.

    I don’t spend an “enormous amount of time and energy agonizing over what they [ I ] SHOULD have done”.
    But I try to learn from my mistakes.

    Re. “It’s a sophisticated and skilled individual who has spent years refining their analysis skills,
    mindset and risk tolerance”
    I’m 75 years old, started investing in the share market when i was able to open a check a/c at 18 years.
    Fore 18 months never lost on a single trade, my broker said that I was doing very well,
    this was in a flat market, made 32% in that time, didn’t take years learning to do that.

    When I was a teenager people used to make money on falling share prices by selling
    shares thy didn’t own, there was no law against this except the common law, it
    is fraudulent to sell something you don’t own, every thing was dune by paper in those days,
    so there was often plenty of time but not Always buy them back.

    Now we don’t have too, both myself and ShareWeathSystems can easily legally trade the
    market falls with the instruments that Gary has already mentioned.

    In my opinion Australians are poorly proved for, even though for most workers Superannuation
    is compulsory, i was just trying to make the best that I could find “ShareWeathSystems” better.

    However if your customers would rather lose sum extra money so thy can “sleep at night” so be It.

    DonC.

  • Patrick says:

    Really enjoyed the article, reminded me an old wall street adage ““Up a staircase, down an elevator” regarding short selling.

    I remembered the good old days trading CFDs in both direction, so stressful and having to watch the market all the time. It is so good to just need to do a scan at night and place the trade the next day and repeat!

    Thank you Gary and Share Wealth Systems for a system that works, took years to find something so sophisticated underneath yet so easy to use above the iceberg.

    Thank you!

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