3x the S&P CAGR with less risk?

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Booogle
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3x the S&P CAGR with less risk?

Post by Booogle »

https://papers.ssrn.com/sol3/papers.cfm ... id=2741701

Can someone explain this academic paper to me?
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Re: 3x the S&P CAGR with less risk?

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Re: 3x the S&P CAGR with less risk?

Post by willthrill81 »

From just reading the abstract, they show that using leveraged funds in conjunction with trend following via moving averages would have improved all around performance significantly. A quick examination of one such approach in Portfolio Visualizer with live funds supports this. Holding SSO, a 2x leveraged S&P 500 fund, when it was above its 10 month moving average (roughly equivalent to a 210 day moving average) and holding cash otherwise since May of 2007 (earliest available data in PV) would have led to the performance below. Using a bond fund like VUSTX, a long-term Treasuries fund, would have improved the annualized returns significantly even over this, boosting the annualized returns to 22% while not affecting the maximum drawdown at all.

Image
https://www.portfoliovisualizer.com/tes ... ion1_1=100

But unfortunately, you cannot buy the past. The future could turn out in such a way that this strategy would have grossly underperformed. I am not recommending this strategy or any other market timing strategy. YMMV.
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Re: 3x the S&P CAGR with less risk?

Post by Marseille07 »

It's interesting. The idea is that 200DMA lets you get out before craziness (basically 1929 is a non-issue if you cash out early), and lever it up 3x during good times.

For the retirees though, they need to figure out their tax situation as presumably they'd have to cash out everything whenever the S&P breaches 200DMA.
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Re: 3x the S&P CAGR with less risk?

Post by Marseille07 »

willthrill81 wrote: Tue Nov 23, 2021 10:10 am From just reading the abstract, they show that using leveraged funds in conjunction with trend following via moving averages would have improved all around performance significantly. A quick examination of one such approach in Portfolio Visualizer with live funds supports this. Holding SSO, a 2x leveraged S&P 500 fund, when it was above its 10 month moving average (roughly equivalent to a 210 day moving average) and holding cash otherwise since May of 2007 (earliest available data in PV) would have led to the performance below. Using a bond fund like VUSTX, a long-term Treasuries fund, would have improved the annualized returns significantly even over this, boosting the annualized returns to 22% while not affecting the maximum drawdown at all.

Image
https://www.portfoliovisualizer.com/tes ... ion1_1=100

But unfortunately, you cannot buy the past. The future could turn out in such a way that this strategy would have grossly underperformed. I am not recommending this strategy or any other market timing strategy. YMMV.
Turned out we can fine-tune the params exactly: https://www.portfoliovisualizer.com/tes ... ion1_1=100

Still looks decent to me. I also like that the MaxDD is only -38% despite using 2x during 2008.
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Re: 3x the S&P CAGR with less risk?

Post by Hydromod »

Marseille07 wrote: Tue Nov 23, 2021 10:24 am
willthrill81 wrote: Tue Nov 23, 2021 10:10 am From just reading the abstract, they show that using leveraged funds in conjunction with trend following via moving averages would have improved all around performance significantly. A quick examination of one such approach in Portfolio Visualizer with live funds supports this. Holding SSO, a 2x leveraged S&P 500 fund, when it was above its 10 month moving average (roughly equivalent to a 210 day moving average) and holding cash otherwise since May of 2007 (earliest available data in PV) would have led to the performance below. Using a bond fund like VUSTX, a long-term Treasuries fund, would have improved the annualized returns significantly even over this, boosting the annualized returns to 22% while not affecting the maximum drawdown at all.

Image
https://www.portfoliovisualizer.com/tes ... ion1_1=100

But unfortunately, you cannot buy the past. The future could turn out in such a way that this strategy would have grossly underperformed. I am not recommending this strategy or any other market timing strategy. YMMV.
Turned out we can fine-tune the params exactly: https://www.portfoliovisualizer.com/tes ... ion1_1=100

Still looks decent to me. I also like that the MaxDD is only -38% despite using 2x during 2008.
Try with ULPIX and UOPIX for longer backtests into 1998
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Re: 3x the S&P CAGR with less risk?

Post by Marseille07 »

Hydromod wrote: Tue Nov 23, 2021 11:35 am
Marseille07 wrote: Tue Nov 23, 2021 10:24 am
willthrill81 wrote: Tue Nov 23, 2021 10:10 am From just reading the abstract, they show that using leveraged funds in conjunction with trend following via moving averages would have improved all around performance significantly. A quick examination of one such approach in Portfolio Visualizer with live funds supports this. Holding SSO, a 2x leveraged S&P 500 fund, when it was above its 10 month moving average (roughly equivalent to a 210 day moving average) and holding cash otherwise since May of 2007 (earliest available data in PV) would have led to the performance below. Using a bond fund like VUSTX, a long-term Treasuries fund, would have improved the annualized returns significantly even over this, boosting the annualized returns to 22% while not affecting the maximum drawdown at all.

Image
https://www.portfoliovisualizer.com/tes ... ion1_1=100

But unfortunately, you cannot buy the past. The future could turn out in such a way that this strategy would have grossly underperformed. I am not recommending this strategy or any other market timing strategy. YMMV.
Turned out we can fine-tune the params exactly: https://www.portfoliovisualizer.com/tes ... ion1_1=100

Still looks decent to me. I also like that the MaxDD is only -38% despite using 2x during 2008.
Try with ULPIX and UOPIX for longer backtests into 1998
Thanks, they still look decent to me. Bailing on 200DMA makes it relatively safe, at the expense of missing some of the recovery.
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Re: 3x the S&P CAGR with less risk?

Post by jarjarM »

This paper was discussed several times here on the forum.

Here are a few. TLDR, it looks good in backtest since it gets out of dire situation like 1929/2008 and etc, 200 day SMA avoids some of the whiplash but not all, future is unknowable and more importantly, many momentum funds are running 10month/200day SMA so your trades may happen during the most volatile period of trading and price entry/exit is distorted. Have fun exploring. :beer

viewtopic.php?f=10&t=297591
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Re: 3x the S&P CAGR with less risk?

Post by firebirdparts »

I trust everybody looking at that graph will actually see it. A problem you get into in real time is that those long years of underperformance are going to feel long. I don’t know if a person would or should be sold enough to hang on and catch the good trades along with the bad.

If you don’t see the long years of underperformance, then let’s hope you wouldn’t notice them in real time either.
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Re: 3x the S&P CAGR with less risk?

Post by willthrill81 »

firebirdparts wrote: Tue Nov 23, 2021 12:03 pm I trust everybody looking at that graph will actually see it. A problem you get into in real time is that those long years of underperformance are going to feel long. I don’t know if a person would or should be sold enough to hang on and catch the good trades along with the bad.

If you don’t see the long years of underperformance, then let’s hope you wouldn’t notice them in real time either.
Isn't this also true of anyone holding fixed income while stocks are soaring?
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Re: 3x the S&P CAGR with less risk?

Post by willthrill81 »

Marseille07 wrote: Tue Nov 23, 2021 10:12 am For the retirees though, they need to figure out their tax situation as presumably they'd have to cash out everything whenever the S&P breaches 200DMA.
Even in a taxable account, a leveraged ETF strategy can be effectively zeroed out with no tax implications via options. But this strategy is far simpler in a tax-advantaged account.
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Re: 3x the S&P CAGR with less risk?

Post by marcopolo »

willthrill81 wrote: Tue Nov 23, 2021 12:06 pm
firebirdparts wrote: Tue Nov 23, 2021 12:03 pm I trust everybody looking at that graph will actually see it. A problem you get into in real time is that those long years of underperformance are going to feel long. I don’t know if a person would or should be sold enough to hang on and catch the good trades along with the bad.

If you don’t see the long years of underperformance, then let’s hope you wouldn’t notice them in real time either.
Isn't this also true of anyone holding fixed income while stocks are soaring?
Some people even claim that such a strategy is easier to stick than "buy and hold". :beer
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Re: 3x the S&P CAGR with less risk?

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Re: 3x the S&P CAGR with less risk?

Post by Marseille07 »

It comes down to whether you believe this sentence or not:
A day like Black Monday could happen at anytime and if there wasn't a choppy market leading up to it you will miss it with moving averages.
It is true that the 200-DMA strategy is helped by a drop right before the 1987 Black Monday. The question is, does our market really drop by 10%+ "at anytime"? The history seems to indicate no.
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Re: 3x the S&P CAGR with less risk?

Post by willthrill81 »

Marseille07 wrote: Tue Nov 23, 2021 12:46 pm
It comes down to whether you believe this sentence or not:
A day like Black Monday could happen at anytime and if there wasn't a choppy market leading up to it you will miss it with moving averages.
It is true that the 200-DMA strategy is helped by a drop right before the 1987 Black Monday. The question is, does our market really drop by 10%+ "at anytime"? The history seems to indicate no.
According to Wikipedia, there have only been four days when the S&P 500 dropped by 10% or more in a single day. Two were in October of 1929, one was Black Monday in 1987, and the other was March 16th of 2020.
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Re: 3x the S&P CAGR with less risk?

Post by Marseille07 »

willthrill81 wrote: Tue Nov 23, 2021 12:52 pm
Marseille07 wrote: Tue Nov 23, 2021 12:46 pm
It comes down to whether you believe this sentence or not:
A day like Black Monday could happen at anytime and if there wasn't a choppy market leading up to it you will miss it with moving averages.
It is true that the 200-DMA strategy is helped by a drop right before the 1987 Black Monday. The question is, does our market really drop by 10%+ "at anytime"? The history seems to indicate no.
According to Wikipedia, there have only been four days when the S&P 500 dropped by 10% or more in a single day. Two were in October of 1929, one was Black Monday in 1987, and the other was March 16th of 2020.
Right, 10% was kind of arbitrary by me but those big drops were often preceded by smaller drops leading up to them. March 16th, 2020 was no exception, the market was already choppy since Jan / Feb 2020.

This is why I don't buy the reddit guy's notion that "a day like Black Monday could happen at anytime."
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Re: 3x the S&P CAGR with less risk?

Post by willthrill81 »

Marseille07 wrote: Tue Nov 23, 2021 12:57 pm
willthrill81 wrote: Tue Nov 23, 2021 12:52 pm
Marseille07 wrote: Tue Nov 23, 2021 12:46 pm
It comes down to whether you believe this sentence or not:
A day like Black Monday could happen at anytime and if there wasn't a choppy market leading up to it you will miss it with moving averages.
It is true that the 200-DMA strategy is helped by a drop right before the 1987 Black Monday. The question is, does our market really drop by 10%+ "at anytime"? The history seems to indicate no.
According to Wikipedia, there have only been four days when the S&P 500 dropped by 10% or more in a single day. Two were in October of 1929, one was Black Monday in 1987, and the other was March 16th of 2020.
Right, 10% was kind of arbitrary by me but those big drops were often preceded by smaller drops leading up to them. March 16th, 2020 was no exception, the market was already choppy since Jan / Feb 2020.

This is why I don't buy the reddit guy's notion that "a day like Black Monday could happen at anytime."
I agree. Volatility clustering has been and seems to continue to be very much alive and well.
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Re: 3x the S&P CAGR with less risk?

Post by Marseille07 »

willthrill81 wrote: Tue Nov 23, 2021 12:59 pm I agree. Volatility clustering has been and seems to continue to be very much alive and well.
Tbh this might be an interesting "funny money" trade though. I guess one issue is that this can generate STCG at any moment, because once SPX breaches 200d MA then you have to get out.
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Re: 3x the S&P CAGR with less risk?

Post by Beensabu »

It's timing with leverage. Is that something you're interested in? It's only less risk while volatility stays low and the overall direction is one way. Super awesome for some along the way. Super sucky for those who get the timing wrong.

Ask yourself this: if everyone is using the same measure to determine timing, how long do you think that measure will hold true? You can't know. When it fails, it will fail big. And the "but, but, but..." won't do crap all for you.

You cannot rely on any particular metric to guarantee you anything or provide you with a "guardrail". Guardrails fail, either intrinsically or at high enough velocities. People still careen to their deaths.

It's risky. There is no "less risk"; there is only fooling yourself into believing that's the case.

Diversify. Prepare for all things to the fullest extent possible that makes sense for your particular situation. And maintain. If one thing comes to pass, you were prepared a bit. That doesn't mean shift everything to contend with that thing. Leave it alone. The other bits are still there to contend with the other things that may still come to pass. You can't guess the timing of anything. You just can't. Don't try. All possible futures, all the time. Figure it out, and then leave it alone. At least until you get to a point where a possible future you disregarded as irrelevant to your past situation actually matters now (i.e. inflation to low vs. high net worth).
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Re: 3x the S&P CAGR with less risk?

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Marseille07 wrote: Sat Nov 27, 2021 3:24 pm
willthrill81 wrote: Tue Nov 23, 2021 12:59 pm I agree. Volatility clustering has been and seems to continue to be very much alive and well.
Tbh this might be an interesting "funny money" trade though. I guess one issue is that this can generate STCG at any moment, because once SPX breaches 200d MA then you have to get out.
Preferably, this would be done in a tax-advantaged account. But options can be used to effectively zero one's stock exposure in a taxable account without generating any capital gains.
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Re: 3x the S&P CAGR with less risk?

Post by willthrill81 »

Beensabu wrote: Sat Nov 27, 2021 4:14 pm Ask yourself this: if everyone is using the same measure to determine timing, how long do you think that measure will hold true?
The more people that use a given measure, the better it should work. If many are selling at the same time, that would push the price the lower, and vice versa.

But in reality, not even close to everyone is using the same measure, and a large swath of the market isn't timing anything at all.
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Re: 3x the S&P CAGR with less risk?

Post by nisiprius »

The article was literally written by a person selling a newsletter. I'll avoid posting the link. The website claims that it is
The Only Investment Strategy Report You'll Need

Developed from award-winning market research, The Lead-Lag Report gives you powerful market insights to improve your long-term investment strategy. This report combines detailed risk analysis with tactical investment opportunities and delivers those insights directly to you every day. Most importantly, you’ll be able to capitalize on market trends before most investors are even aware of them.
If you gave a million monkeys a million spreadsheets and put them to work for a million years, they would eventually come up with a backtest even better than that one.

The problem with this stuff is that financial history is episodic. It doesn't take a great deal of overfitting to come up with something that steers around the known past hazards. And if we're steeped in financial history we already know where those hazards are, even before start inventing and backtesting strategies, and unconsciously influence the strategies we invent.

And even after that, the elephant in the room is always "please give us an accurate count of the number of strategies you backtested before you came up with one you are showing us."

In 1963, it was genuinely creepy whenever it was pointed out that for a hundred and forty years, every president elected in a year ending in zero had died in office.* By 1984, Only eight out of thirty-five presidents had died in office. The probability of seven consecutive terminal-zero-year elections having presidents dying in office would appear to be (8/35)⁷ = 0.00326% or less than 1 in 30,000. That would appear to be highly statistically significant. The creepiness didn't wear off until Ronald Reagan survived his second term.

The only way you can have a 1/30,000 chance be meaningless is if the community of people looking for patterns in data is unconsciously testing and rejecting hundreds of thousands of hypotheses.

(Remember the one about candidates with double letters in their name always beating candidates without?)

I think the reason why it is so common to see "innovative" mutual funds, preceded by mouthwatering backtests, produce emphatically disappointing results, is that once the mutual fund is launched, you now see the public, visible results of committing to a single strategy. It's no longer possible to adjust the strategy and show only the results of the improved strategy.

*I don't know when it started being called "the curse of Tippecanoe." It was not called that during the sixties.
Last edited by nisiprius on Sat Nov 27, 2021 5:01 pm, edited 5 times in total.
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Re: 3x the S&P CAGR with less risk?

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willthrill81 wrote: Sat Nov 27, 2021 4:19 pm
Beensabu wrote: Sat Nov 27, 2021 4:14 pm Ask yourself this: if everyone is using the same measure to determine timing, how long do you think that measure will hold true?
The more people that use a given measure, the better it should work. If many are selling at the same time, that would push the price the lower, and vice versa.
Not necessarily. If the 200 MA line is crossed, if everyone goes to sell at the same time, your trade may not make it through until the market has already dropped another 5%-10%-15% in a day (because everyone is selling).

The smart investor would sell right before the 200 MA line is crossed, so not to get caught up in that mess. But guess how many people are going to have that idea? A LOT.

And that's how "systems" stop working once every one knows about the system.
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Re: 3x the S&P CAGR with less risk?

Post by Beensabu »

willthrill81 wrote: Sat Nov 27, 2021 4:19 pm
Beensabu wrote: Sat Nov 27, 2021 4:14 pm Ask yourself this: if everyone is using the same measure to determine timing, how long do you think that measure will hold true?
The more people that use a given measure, the better it should work. If many are selling at the same time, that would push the price the lower, and vice versa.
Yes. Until someone else figures out how to exploit that. And then it goes boom.

There are no guarantees. There are lulls, where we believe they may exist. And then the eventual storm. Any observance of order to chaos is only temporary. That's just how it goes.
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Re: 3x the S&P CAGR with less risk?

Post by GAAP »

A strategy that counts on a certain event to occur or not occur is a strategy based upon a guess. That is even more true when you're counting on the aggregate behavior of a large number of people.

If crowd surge is not rational, it should never occur, and nobody would die from it at a concert. The "rats abandoning ship" behavior can occur at any time -- markets are not an exception.
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Re: 3x the S&P CAGR with less risk?

Post by willthrill81 »

Beensabu wrote: Sat Nov 27, 2021 4:29 pm
willthrill81 wrote: Sat Nov 27, 2021 4:19 pm
Beensabu wrote: Sat Nov 27, 2021 4:14 pm Ask yourself this: if everyone is using the same measure to determine timing, how long do you think that measure will hold true?
The more people that use a given measure, the better it should work. If many are selling at the same time, that would push the price the lower, and vice versa.
Yes. Until someone else figures out how to exploit that. And then it goes boom.
It takes guts, ignorance, or both for someone to try to catch the proverbial falling knife. It often ends up bloody.

Maybe someone has figured out to how exploit the inverse of something like the 200 DMA. But if they have, they're seem to be keeping mum about it.
Beensabu wrote: Sat Nov 27, 2021 4:29 pm There are no guarantees.
Of course, and that applies to all investment strategies.
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Re: 3x the S&P CAGR with less risk?

Post by willthrill81 »

HomerJ wrote: Sat Nov 27, 2021 4:26 pm
willthrill81 wrote: Sat Nov 27, 2021 4:19 pm
Beensabu wrote: Sat Nov 27, 2021 4:14 pm Ask yourself this: if everyone is using the same measure to determine timing, how long do you think that measure will hold true?
The more people that use a given measure, the better it should work. If many are selling at the same time, that would push the price the lower, and vice versa.
Not necessarily. If the 200 MA line is crossed, if everyone goes to sell at the same time, your trade may not make it through until the market has already dropped another 5%-10%-15% in a day (because everyone is selling).
I'm curious how many times that has actually happened. In the last 30+ years, my guess is very close to zero.
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Re: 3x the S&P CAGR with less risk?

Post by HomerJ »

willthrill81 wrote: Sat Nov 27, 2021 5:15 pm
HomerJ wrote: Sat Nov 27, 2021 4:26 pm
willthrill81 wrote: Sat Nov 27, 2021 4:19 pm
Beensabu wrote: Sat Nov 27, 2021 4:14 pm Ask yourself this: if everyone is using the same measure to determine timing, how long do you think that measure will hold true?
The more people that use a given measure, the better it should work. If many are selling at the same time, that would push the price the lower, and vice versa.
Not necessarily. If the 200 MA line is crossed, if everyone goes to sell at the same time, your trade may not make it through until the market has already dropped another 5%-10%-15% in a day (because everyone is selling).
I'm curious how many times that has actually happened. In the last 30+ years, my guess is very close to zero.
Oh, I didn't say that there are too many people using it now... I'm saying that more and more people using it may not necessarily be good. At some point, it might tip over.
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Re: 3x the S&P CAGR with less risk?

Post by Beensabu »

willthrill81 wrote: Sat Nov 27, 2021 5:13 pm
Beensabu wrote: Sat Nov 27, 2021 4:29 pm
willthrill81 wrote: Sat Nov 27, 2021 4:19 pm
Beensabu wrote: Sat Nov 27, 2021 4:14 pm Ask yourself this: if everyone is using the same measure to determine timing, how long do you think that measure will hold true?
The more people that use a given measure, the better it should work. If many are selling at the same time, that would push the price the lower, and vice versa.
Yes. Until someone else figures out how to exploit that. And then it goes boom.
It takes guts, ignorance, or both for someone to try to catch the proverbial falling knife. It often ends up bloody.

Maybe someone has figured out to how exploit the inverse of something like the 200 DMA. But if they have, they're seem to be keeping mum about it.
Beensabu wrote: Sat Nov 27, 2021 4:29 pm There are no guarantees.
Of course, and that applies to all investment strategies.
Why do they have to catch the knife? Why can't they just drop it before everyone else? If the move is big enough (or there are enough big ones at around the same time), that's all it takes. Homer J already said. It could be a bunch of people deciding to drop early, or just a few big ones. Just one huge "that's it, I'm out" drop before everyone else thought it was going to happen. And then the wave is on you, and you just have to hold your breath and hope what you think is up is actually up, because if it's down, you won't know until you hit your head.
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