Nuances | stockbee

2/06/2007

Nuances

The market continues to crawl up. Yesterday was another day which saw large number of new breakouts. While the market strength is impressive from a risk reward perspective, entries in to fresh positions after a sustained moves can be more risky.

Timing an entry in to a stock which has strength but on a short term weakness offers best risk reward because most of the time if the entry works, you are entering at the beginning of a fresh significant move. One must chose the period of weakness carefully, too low a period is not meaningful.

A systemic approach like the 'Double Trouble' gets you in to good moves at the beginning of major moves after market correction. For example in July there were less than 120 stocks in the 100% list. The number of breakouts were in single digits. The breakouts which happened during July, August period have doubled or tripled by now. Many of the breakouts now happening in the list are happening after a long move. So risk is higher.

The other thing is at the beginning of significant move after corrections the breakouts are of lesser magnitude in the sense you will find less number of breakouts above 10% , as momentum builds up more 10% breakouts happen, your stop become wider.
There are many nuances such as these you learn if you trade same thing for years.If you trade same concepts or systems for 5-6 years or more you learn so many nuances that you can dramatically improve the results with small tweaks.

Most big edge ideas are extremely durable because they exploit a structural anomalies in the market. Consider that with conventional wisdom which says most systems decay or deteriorate. Why do they deteriorate because they are not necessarily based on proven anomalies. Look at the earnings or momentum anomalies, they have been around for years and very robust.The 'Double Trouble' is basically a twist on momentum anomaly.

Most unsuccessful traders never trade a single approach for long period of time. They flirt from one approach to another. The other problem is most of them have every other system but those based on most significant anomaly.

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