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Saturday, April 3, 2010

Need and Greed

I hear this a lot “I have a new system” and then a elaborate details of how the system would work. I read about systems on the blogs that consistently make profits. In my books there are 2 types of systems

System I - This is the mother of all systems. It is called buy and hold for ever. Up, down or sideways we just buy and hold it forever. We put all our efforts in determining the “right” thing to buy. JNJ, AAPL, GE etc.

System type II - All other systems. They try to catch the price moments over time. 1) buy low sell high 2) buy lower than the previous high and sell high 3) short high and buy low 4) short higher than previous high and buy low. Some just do 1 and 2. Most try to do 1,2,3 and 4. and IMHO that is greedy. It is cool. The risk is high and rewards are satisfying. Now I leave it to ones own imagination about the odds of being correct 4 times as compared to once in the buy and hold system. Yet it is the alchemy that drives us all. Gann, Elliot, Adi, you, me and all of us. That’s the fun part of it.

FAS 60 min DOMA 77FAZ 60 min DOMA 77

These are two charts of FAS and FAZ. The evil twins. Extremely dangerous but boy does the fruit taste good. These look very simple and indeed they are very simple. Most pundits and statistical experts will probably find hundreds of imperfections in it. The biggest test they fail is that they are not complicated enough. A system that doesn’t have a huge set of equations and lines flying everywhere in the graphs and large number of rules for when to buy and sell somehow is not considered impressive. I am not in a competition to win the most money. I have a simple test Does this make you money. Yes. Then it is a good system. That is all there is to it. These are 60 minute charts with DOMA 77. To me if FAS/FAZ breaks the DOMA I will buy some FAZ for situation trade. MOST bull ETFs made new highs for the week and with no change in any of the indicators I will stay bullish.

This is an excel I created to show how DMRM works. I start with low of 59.82 (Row3 Col 7). The buy points are 3.2% above the low and shorting points are 3.2% below the high. The max profit is selling at the high and minimum profits is selling at the other side at the shorting signal. I found you get a series negative or very minute profits at bottoms and at tops as if to take away the profits one made in the middle. At this point if FAS were to fall below 96.36 I would buy FAZ. This complements my DOMA trading real well. This is an example of a slightly complicated system. I would require that all systems provide this kind of data for proper evaluation.

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