Friday, May 15, 2009

The Value of Historical Market Analyses: Being Prepared and Being Confident

Past market behavior is no guarantee of the future, but sometimes it reveals a worthwhile edge. Prior to yesterday's market bounce, I posted a historical analysis that showed a tendency to move higher the day after a strong momentum day to the downside, followed by several days of follow through weakness. Looking at a different, but related pattern, Rob Hanna came to similar conclusions in his Quantifiable Edges blog. When you look at history in different ways and see common patterns, that is the time to entertain those patterns as active hypotheses in your planning for the trading day--especially when intraday patterns begin to confirm your hypotheses.

All of the historical patterns that I investigate simply involve a few basic manipulations in Excel. Alternatively, a subscription to a newsletter such as Quantifiable Edges allows analysts such as Rob to do the heavy data lifting for you. I see in the latest newsletter, Rob finds a challenging pattern: the market yesterday rose on good breadth but weak volume. He goes back into history and sorts out what we might expect going forward. I won't give away Rob's punch line; I'll just say that he's in the green this morning.

So much of being confident in trading boils down to being prepared.