Having read and responded to a few comments, there is one point that I wish to expand upon. The point that John Forman raised, viz. the teaching of a system, that without the coach, the coachee cannot continue.

From marketsci:

This is the last post in our series analyzing the DVI (read part one, two and three), a contrarian intermediate-term (IT) indicator from CSS Analytics (click to calculate).

In this post I’ll compare the DVI to an IT indicator I use a lot in my own trading.

I want to drive home the point that all of these price-based IT indicators, despite being very different in their calculations, tend to pick similar entries/exits, so we should be looking at them as “concepts” and not marrying any one in particular.

In the graph above I’ve shown the results of trading the S&P 500 index using the DVI strategy described in my first post (red), versus trading my own IT indicator (grey) in a similar fashion (above/below the midpoint), from 1970 to the present.

See end of post for assumptions about dividends, return on cash, and trade frictions.

This is a rare post where I’m not going to disclose everything going on under the hood. I’m going to keep my IT indicator a black box, but know that it’s a component in ALL of our proprietary strategies, I’ve been trading with it for almost a decade, and I even include it on the free State of the Market report (yes, I love this concept).

It’s radically different than DVI in how it’s calculated, but it shares the fact that it’s only considering price (and not other data like volume or the price of tea in China).

Numbers for the number-lovers …

Just by visual inspection, it’s pretty clear these two strategies are close cousins. Any difference in performance between the two is most likely random chance.

The Point

The point of showing the data above is to say that, despite our best efforts to make one indicator better than another, indicators that are timing the market in similar timeframes (in this case, the intermediate-term) using similar data (in this case, price) are going to come to similar conclusions about the market.

That’s why RSI(2), DV(2), etc. generally say the same thing about the short-term state of the market (read more), or different variations of long-term moving averages say the same thing about the trend.

Unless we’re changing something much more fundamental, indicators tend to just be regurgitations of each other.

There are things that might make this indicator preferable to that one for you (ex. I like that DVI is both “bounded” from 0 – 100% and “normalized” to recent market data, and that my own indicator is more-KISS and a “dimmer” not a “light-switch”), but none of those preferences justify marrying any of them.

We should choose one (or two), add that “concept” to our trading, and move on to find other concepts, and not other redundant indicators.

And I think the DVI is a perfectly reasonable choice to fill traders’ need for a price-based, intermediate-term indicator.

This dovetails nicely with my reply to John: essentially, trading, whatever system that you employ, has basic fundamentals underlying, and they are consistent across all strategies, systems etc.

The only variations to this are Option based strategies that look at volatility or time rather than direction. These however, if desired, can be coached on the same basis.

Thus our coach, to get paid and deliver value, must be able to teach the fundamentals and implement the correct strategy for market conditions. This is important, and there has been much discussion around blogoland with regard to trend continuation, counter-trend trading, that the correct strategy is employed for current market conditions. Of course, the wrong strategy for market conditions will see losses to a valid strategy, in the wrong conditions.

Food for thought

Advertisements