Notes for December 30, 2011

[mingpan.lam]

good to keep in mind the mind set necessary to trend trade

Thanks for the URL, Nickola. I don't have any problem if it is just bad luck but if EV becomes less effective when the volume is low then it is something the robots can be improved. From what I understand, the robots are not using the total volume compare to the past average as one of the decision process (pls correct me if I am wrong), of course we can simply ignore December, then we are not 100% mechanical following the robots. It will be interesting to see the robots' performance using total volume/average(total volume) as a filters.

[asomani]

An expensive lesson for me not to trade in Dec. Also agreed with Adam, a warning is a good idea, especially for some newbie, like me.

Cheers,

Ellis

What adjustments should one make to their trading style in December (or other extended holiday periods), in your opinion? Has anyone got some insight they'd like to share on this?

The most common adjustments I see experienced traders make:
1. Cut normal position size in at least half, if not further.
2. Avoid trading altogether.

[grems8544]

What adjustments should one make to their trading style in December (or other extended holiday periods), in your opinion? Has anyone got some insight they'd like to share on this?

The most common adjustments I see experienced traders make:
1. Cut normal position size in at least half, if not further.
2. Avoid trading altogether.

With respect to #2, avoid trading, this would most likely be a mistake over the long haul.

Pulling down my handy-dandy Stock Trader's Almanac, November, December, and January are the year's best three-month span using the data from January 1950 to April 2009 (I'm using my 2010 edition since I can't seem to find my 2011 copy). To whit: average gains of the S&P are 1.5%, 1.6%, and 1.1% for the three months respectively. For the R2K, since 1971, we have 1.8%, 2.6%, and 1.9% respectively. If you want to be defensive, e.g., R1K, then you're looking at 1.7%, 1.6%, and 1.2% respectively. The NAS is along the same lines: 1.6%, 1.9%, and 3.0% respectively.

The problem isn't addressed by sitting out the market unless you simply cannot tolerate the volatility. For those of us who cannot stomach a bad year and then more volatility as we go into a low-volume period, then sitting out is the best course of action, but it's not the most prudent in terms of building wealth.

Shortening time horizons for holding appears to be the best solution. Taking profits quickly, e.g., when a profit target was hit as opposed to a macro signal changing, also seemed to be the key over the past few weeks. When we did whipsaw to the down side, I'd always placed a timed order for a trailing stop loss of 1% to be active for the DAY at 9:35 on the day where it looked like I was going to get clobbered. More often than not my TSL remained intact and expired at the end of the day. Riding through the volatility seemed to work, but again, my exposure was quite slight.

Anyways, we start a new year on Tuesday. I expect a bump in January, but then if I'm not careful, February (historically) is a really poor month and it would be quite easy to give it all up. Your crystal ball is as good as mine.

Regards,

pgd

[asomani]

Thanks for your thoughts, Paul.

Pulling down my handy-dandy Stock Trader's Almanac, November, December, and January are the year's best three-month span using the data from January 1950 to April 2009 (I'm using my 2010 edition since I can't seem to find my 2011 copy). To whit: average gains of the S&P are 1.5%, 1.6%, and 1.1% for the three months respectively. For the R2K, since 1971, we have 1.8%, 2.6%, and 1.9% respectively. If you want to be defensive, e.g., R1K, then you're looking at 1.7%, 1.6%, and 1.2% respectively. The NAS is along the same lines: 1.6%, 1.9%, and 3.0% respectively.

Long-only traders (especially if trading on a longer timeframe than a single day) as well as investors tend to do particularly well in Dec for obvious reasons (outlined by you). Long/short traders may be at a disadvantage, however. For instance, if a long/short strategy does not adequately take into account market seasonality and market volume levels in its approach, then abnormally large and/or abnormally frequent losses in the strategy developing during a holiday period, especially on the short side, would not be surprising. Short trades that would be avoided by a more sophisticated (but not necessarily ultimately better) strategy can end up being taken by a less sophisticated (but not necessarily ultimately worse) strategy, during a holiday period.

Nov and Jan both normally have a reasonable amount of volume and shouldn't be considered holiday periods, in my opinion.

Taking profits quickly is a valid option, but then the stop used on trades would also need to be tighter than normal to compensate for this approach, I would think. Otherwise one losing trade in Dec could wipe out a number of other winning trades during the same month but that were only small winners.