Forum Archive Index - February 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Travis,

Phaedrus is away trading.  However I'm familiar enough with his 
methods to give some insight as to how he might answer your 
questions, without presuming to speak for him. 

>
>>Another claim :- "Trend following systems have the
>>fatal flaw that they result in very high
>>turnover..." Nonsense! Take another look at the TLS
>>chart that began this discussion - ONE trade in over
>>5 years! I have posted many charts of stocks in
>>long-term uptrends, with the comment "it is all but
>>impossible to beat buying and holding stocks that
>>are in steady long-term uptrends like this". Anyone
>>wishing to avoid the costs associated with more
>>active trading can easily devise a system based on
>>long-term trends that will signal very, very few
>>transactions.
> 
> How many times is one faked in and out of these? 
>
>

None

>
>
> Telstra has not gone straight down, there have been
> numerous rallies along the way.  It was not at all
> clear where the trend channel lines should be drawn
> until the trend was well under way.
>
> 

If you look at Phaedrus's post on 31st January you can see his sell 
point clearly indicated on the graph he posted.  His sell point looks 
to be about $7.75, well below the resistance point of just over $9.   
At this point the share goes into a trading range where the trend is 
not present.   The whip sawing you talk about Travis, giving false 
signals is occurring at this point but Phaedrus is not paying 
attention to these false signals.  Once Phaedrus quits a trade he 
will not trade again in that share unless a new  uptrend direction 
is firmly established.  This usually means the share must break 
previous resistance levels and it is clear it does not.   Once the 
next trend is established it is clearly a downtrend.  Phaedrus does 
not invest in shares that are in medium and long term downtrends.

>
> 
>The trends are unambiguous, apparantly work more than
>50% of the time and do not generate high turnover
>which means they generate a singal buy/sell signal and
>not a series of whipsaws.  
>
>

It is not necessary to get a 50% strike rate to have a profitable 
trading system.  The key is to make sure the value of your winning 
trades more than cancel out the value of your losing trades which is 
not the same thing.   For example, suppose you can show that by 
jumping on share that is in a confirmed uptrend there is a one in ten 
chance that a share will increase in price by 50%.  You identify ten 
shares that are in an uptrend and buy them all.  One of these shares 
does appreciate by 60%.  The other nine start to rise then fall away, 
fall immediaetely or stay flat.   The average return from these nine 
shares, after brokerage is -5%.  You don't lose more than this 
because you have a tightly placed 'stop loss' on all of these shares.

Your single remaining share actually appreciates 60% but then falls 
away and you exit your share trade making a 50% gain.  This gain 
neatly cancels out five percent losses on all the nine other shares 
leaving you with a small profit.  The purpose of this example is to 
show that even with 90% of your trades being losing ones, you can 
still come out ahead. 


> 
>It won't tell you when the trend ends, it will give a
>late signal.  As useful as "that was the turnoff" from
>one's wife while you've just sailed past it in the
>right lane at 100kmh.
>

Phaedrus has never claimed his system gives anything other than a 
late signal.  A reactive system, such as he uses, will always give a 
late signal.  The fact that by using a late signal means that he will 
never buy at the absolute bottom of the market nor never sell at the 
absolute top is a fact he has acknowledged here many times.  By the 
same token a Buffett value investor cannot guaranteee that he will 
sell at the top either.  But that fact doesn't invalidate the 
usefulness of being a value investor.

> 
> 
> You wouldn't maybe turn this around and determine a
> fair price before the trend turns around, so you'll be
> prepared?
>
>

Fundamental analysis, if it is useful, requires much more legwork 
than T/A.  Ideally if you were using a mixed T/A and fundamentals 
approach  you would do your fundamentals research first.  However, 
that would necessitate looking at a much narrower range of shares and 
you might miss out on a few bargains you hadn't thought of, which a 
wider T/A net might pick up.

> 
>
>I can't name a successful investor with a public
>record that has used TA with any success.  
>
>

Given that T/A people spend many hours in front of a computer each 
day, and are happy to do so, they may not have the personality type 
to loudly declare their success to the outside world.

>
> 
>after the fact you mean, long after the purchase will
>you have any idea if there was a valid buy signal. 
>Or, if you wait until the "confirmation" what do you
>then do if the stock falls back?
>
>

You sell, taking a loss.   Not a problem as long as your total return 
from winning trades exceeds that of the losing trades

> 
>
>I know the answers to these, but i have great trouble
>reconciling the whipsawing reality of technical
>analysis in real time with your claim that turnover is
>really low.
> 
>

>From what I have seen Phaedrus's turnover is low.  He frequently 
holds shares for several months which is probably about the same 
turnover rate as some of those so called fundamentalist managed funds 
who theoretically buy and sell only for the long term, yet still 
manage to churn their portfoloio over several times a year.


> 
>So how do you know, when you have several
>opportunities, which one to go for?
>


A good question.  Perhaps some traders might be prepared to answer 
that.  I'd love to know too!

> 
>Value investors missed
>out on all the profits from buying Dot Coms in the
>late 90s.  They still have their capital though,
>unlike many.
>

This is why I don't trade.  It is all very well having a stop loss et 
5% below today's price.  But if the share falls 40% in one day you 
are screwed.  The problem is there is no guarantee you will be able 
to implement your carefully crafted risk management policy in times 
of sudden change.

> 
>To believe that you are going to achieve superior
>returns to the bulk of market participants by using
>the same techniques is a bit crazy, to say the least.
> 


Yes but all T/A is not the same, just like all F/A is not the same.  
If for example you picked shares only on P/E ratio being high, thus 
showing the company to be a 'good growth company' you may come 
unstuck.  You can trade on different time scales with different risk 
systems and in effect customize a T/A system unique to yourself. 


> 
>I'm quoting me... my calculation shows that after tax
>and making reasonable (though perhaps too low)
>estimates of trading expenses including brokerage and
>bid/ask spreads that you'd need to achieve about 17%
>as an intrayear trader, before tax and costs, to get
>the same return as a 10% buy and hold investor with a
>5 year holding period.
>

Tax systems in NZ are different to Australia and the USA.  For a 
start there is no capital gains tax.   In theory if you are a short 
term trader you can trade away without the inland revenue department 
getting a whiff of your profits.  You are meant to declare such 
trades as income.  But how many traders in New Zealand do?  I wonder?
If traders keep all of their capital gained in their trades with no 
tax, how does that affect your return analysis Travis?

>
>This is a result of CGT discounting for 12 month+
>holding periods and the lower trading expenses.
> 

There is no such advantage for long term holders in New Zealand

>
>
>I call on evidence such as Terry Odean's studies of
>small investors at discount brokerages that show that
>the higher the turnover the worse you do, 
>
>

Sure, but I don't think Phaedrus does do a high turnover.  Perhaps 
this is one of the reasons he has been trading for several years and 
its still here.

SNOOPY


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