Hello Juan,
I'm pleased to hear you are enjoying the book.
First of all, I congratulate you on your acceptance of the sad fact that
it's extremely difficult to predict the market. I readily admit that I am
also unable to do it. You are correct to have serious doubts that Wall
Street's experts can predict the market, because the evidence tell us they
cannot.
Most managers of actively traded mutual funds - these are the pros who are
paid to manage money - underperform the benchmark indexes. To me that's
all the evidence I need to avoid allowing any of those 'pro's
to manage my money.
But, your question is difficult to answer. You want to know if I
believe a trend following strategy is better than a mechanical system based on
technical analysis. Here is what I believe:
Trend following works. It's not necessary to get in at the
beginning of a large move, nor is it important to get out before that move
starts to reverse. All that's important is to be on board for the
majority of the ride. But, how are you supposed to know when to jump on
board and jump off? To do that, you must be able to recognize that a
trend has started or ended. To me, that is predicting the market.
It is just as difficult to predict that a trend has started as it
is to predict anything else about the market.
In theory trend following is great. But for me, I never know when
to buy or sell. Thus, I don't try. If you believe you have a
reasonable chance of being correct about half the time, then go for it.
If you get it right about half the time, you gains should easily provide
more profits than you lose with the trades that fail.
One reason I use the option strategies outlined in the book
(covered call writing and uncovered put selling) is that my chances of success
are high. I don't have to be right about market direction to make a
profit. If the stock I choose moves in my favor, holds about steady, or
moves against me by a small amount, I win. Those are pretty good
odds. Of course, I am unable to ever catch a huge win (like trend
followers do), but I'll take many small wins when I know I cannot
consistently predict the market.
What strategy is best for you? I really cannot answer except
to say this: Trade in a manner that makes you money over time. If
it's trend following, great. Trade with a methodology that leaves you
comfortable and able to sleep at night. You may have to practice with
paper trading to find your trading niche, but there is one that's right for
you. And this final thought: When you find what works for you, don't
remain married to it - markets change, people change, and you might want to try
something different as time passes. Just keep your risk reasonable and
protect yourself from large losses.
Mark
Hi Mark,
I'm currently reading "Create your own Hedge Fund..." which
I'm enjoying very much.
I would like to know your opinion on Trend
Following Systems who are often criticized for buying high and selling low, but
I'm a convinced that a mechanical trading system is better for someone like me
that has realized that is not able to predict the market, and I have serious
doubts that Wall Street's "experts" are also incapable.
Kind
regards,
Juan Highland
