Sunday, January 17, 2010

Unravelling the Brain of the Market

Going back a little over five years, if you had sold the Dow Jones Industrial Average (DIA) when it rose above its 20-day moving average and bought it when it fell below its 20-day average, you would have wound up with 172 trades, according to the excellent Barchart site. Those trades would have averaged 12 days in duration.

How do you think such a "system" would have fared?

It turns out that 123 trades would have been winners and 49 would have been losers. Over the period, you would have made around 44% on your original capital.

When are traders more likely to be bullish: when we make 20-day highs or lows?

When are traders more likely to be bearish?

Doing what comes naturally--and what seems obvious--is often the losing market strategy. Trends are not necessarily friends.

Indeed, on average, buying short-term strength and selling short-term weakness loses money for traders. It's a nice example of how markets move counter to the ways in which our brains are wired.