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
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
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.Originally Posted by nickola.pazderic
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.
GGT Forum Manager
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
Thanks for your thoughts, Paul.
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.
GGT Forum Manager
So you got me thinking about the long/short plays available. We've been in a range-bound market, with the 200d resistance lines looming over our heads, so this points me to mean-reversion strategies over trending strategies.
EdgeRater is a good program to evaluate Connor's TPS strategies, and they've been doing well on the short side for the month of December. I provided a copy of the strategies in my sticky thread here some time ago. Scroll down to the PDF section and you should be able to download the file, and more importantly, review the criteria for long/shorts on the TPS strategy.
When I present Connor's work in seminars I frequently get beat up by people who think the gain / trade is not worth the effort. Whether you subscribe to this view is individualistic -- profit is profit, and I know a few people who trade Connor's works exclusively and have beaten me this year.
In a perfect world, taking the signal at the end of the day on each side, the trades would look like this:
If you had a $100K to play with using this strategy you'd have $6250/position (hindsight), and when the dust settled, you would have netted about 1.5%. *I* didn't net 1.5% in December, so I should have been paying better attention to this strategy. Kicking myself right now because I play Connor's strategies all the time.
For those of you interested in the stats for the trades above, here are they are:
The long side has been poor:
This simply means that we've been in an up trend for December, contrary to being flat or range-bound, and given the high number of short candidates, we've been more overbought than oversold.
===============
2010 Wasn't nearly as exciting as 2011 from Connor's point of view. Mean reversion doesn't usually work across the board when there is a strong trend, and if you recall, last year saw a sneaker trend rise starting just after Thanksgiving 2010 and continuing through the month of December.
There are no Connor's TPS short candidates that fired last year (in hindsight, of course), but there were 11 trades on the long side:
The low profit / trade tells me that there was not a great deal of exuberance in the market -- prices were not overly volatile and hence were not overbought/oversold. We don't have the luxury of choosing our trades so take what is given ...
December 2008 was an interesting year, specifically in that it also generated NO Connors TPS Long positions, but fired a number of buys on the Short side:
Whether January 2012 will look like January 2009 based on this is anybody's guess. The key here is that there are strategies to play, and for the most part, they appear to be lower-risk / higher probability plays.
===================
If there is interest I'll continue to dive into these, especially from the leveraged point of view, because leverage can give us movement where some of the underlying does not.
Happy New Year everybody!
Regards,
pgd
Paul,
This is very interesting research. I have the Connors book on my shelf, and HGSI provides some tools for the trades. Nonetheless, this type of analysis does not come easily to me. So...please continue. I might even humbly suggest/request a video if you are so inclined.
Many thanks,
I think that Dave summarizes perfectly and concisely what can be said about last year.
I post it here because it resonates well with the discussion that's been going on.
Billy
"2011 was a tough year for most. The trend followers had no trend to
follow and the reversion to the mean guys looked pretty smart until
they blew up.
It was a market that rewarded bad behavior. Just the opposite of
what you should do often worked: not using stops, fading the
market, taking small profits, micromanaging, switching systems,
jumping in and out (for longer-term traders) etc...
I'm glad this one's over."
Thank you for sharing that, Paul. Incredible work given the time within which you have responded. Please do continue at your leisure, as Nickola suggests.
If the emphasis here is on testing strategies that work during holiday periods, I think the focus should not be on the whole of December - as about the first half of it certainly does not exhibit holiday tendencies, in my opinion, as volume holds up okay in the earlier to middle part of the month and bullish seasonality does not take effect until later in the month. In fact, seasonally speaking, the SPX performs poorly for the first half of December (serving as a tailwind for shorts) and strongly in the second half (and this December has once again followed this pattern, almost to the letter).
In my opinion, the real holiday period in December is basically the last 5 trading days of the month, and maybe a few more trading days than that (so perhaps the last 5-7 or even 5-10 trading days of the month, for instance). This year, at first glance, does not seem to be a good example of normal year-end bullish seasonality because the last 5 trading days of the month actually resulted in a rare negative return. However, taking a step back, one would've been well served sitting long for the last 9 or 10 trading days of the month. As an aside, from what I can recall, Jeffrey Hirsch defines the Santa Clause Rally as the last 5 trading days of Dec and first 2 trading days of Jan.
Regardless, to me, your analysis demonstrates a case where the edge of the strategy may not affected by the peculiar features of holiday trading. In other words, certain mean reversion based short strategies may be unaffected performance-wise from the low volume and bullish seasonality of holiday periods like late December, generally speaking, and thereby may be the best way to approach shorting during such periods. It is not surprising if this is true especially if the mean reversion strategy being employed is one that takes profits quickly and does not sit on a position for very long at all.
What about momentum-based shorting? I would be curious how shorting based on momentum rather than mean reversion works during a holiday period. My hypothesis would be that it would more often than not be less effective than during a non-holiday period.
Posting Permissions
Reply With Quote
