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| This is exactly right. This thread has had me thinking about market lows and highs that are not major lows and highs too. My hobby for a couple of decades has been trying to build models of selected markets. One model in particular has always fascinated me. It models the shorter term swings, and it makes money when those swings are the major feature of the market, but it tends to have the occasional big drawdown when the market trends strongly. Normally, a round trip trade lasts 3-6 weeks. The interesting thing is that the buy or sell signals come just when I'm thinking that a trend is just beginning (in the opposite direction of the signal). Say I'm long, and the market starts going up - just about the time I get comfortable with being long, the model is telling me to get out and reverse into a short position. If I do that, again, usually for a few days the market tries its best to convince me that I've done the wrong thing, and when it does go down, just as I feel comfortable with being short, it tells me to reverse and go long. It is always telling me to do exactly what I least want to do. And, that's why it works. Occasionally the model will pick the exact high or low, but usually, it is a bit early or a bit late, as it is averaging out all the previous swing highs and lows and trying to pick the highest probability spot to reverse. It is usually frustrating as it can be, since it is always telling me to do what I don't want to do. But, the system equity chart shows that, over the long term, it has made consistent money now for 6 years in out-of-sample data plus now about 8 or 9 years of real time data. So, in conclusion, if I traded this market and did what I "felt" was the right thing to do, I would lose money consistently. This is why Richard Dennis said that you have to "do the hard thing." | |
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Psychology of market bottoms
