Time Spent In Up, Down and Sideways Mkts 2018 Update

Research / Trading

This study crunches 54+ years of data on the S&P 500 Index and shows the effect of timing the market versus buy and hold strategy. It also measures the time traders spent in various types of markets historically: up, down and sideways.

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1 comment

Sriram Ramanathan

Published on November 10th 2018, 9:02:45 am

Thanks Tom. I tried to do this in Excel and found that it was hard to automate since there is a new high and a new low in each cycle that needs to be adjusted manually. Am I missing something ? Right now I compute drawdown as Current Value/6-month average value (weekly)-1 and I am pleased with how I feel about that emotionally.

Very grateful for your willingness to share your knowledge Tom and I try to emulate your character and approach.

4. buy and hold strategy. There’s just too much risk over time and sooner or later the strategy gets abandoned. Trading in order to position the portfolio w ith the trend makes more sense in keeping the trader mentally balanced, so that they can stick with the plan. They never put themselves into a position that goes against them for very long or for very much.

3. C onclusions : 1. Most of the time (6 1 %) was spent in sideways markets, where trend - followers add little or negative value. However the value lost on each trade was small ( - 1. 35 %). 2. Value was added in both up markets (average +1 4 . 97 %) and down markets (+1 2 . 91 % losses missed ). 3. Timing reduced risk ( - 25.36 % maximum drawdown versus - 56.78% for buy and hold . 4. Only 2 9 % of the total time w as spent in up markets. 5. Only 9 % of the total time was spent in down markets. 6. The rest of time (61%) was spent going sideways 6. The 10 and 50 day exponential crossover system measured about 6.5 round turns ( 13 trades) per year. That is about once per month, so the timing was not that active. 7. Buy and hold beat the timed approach du e to a generally upward bias to stocks over the time period measured. 8. The long - only timing strategy produced a positive return, albeit lower than the buy and hold approach with a lot less risk in the process. H ow I view the results : The key to happy , long - term success in trading is to stay disciplined and stick with your strategy if it is performing the way you would expect it to. If you are in the stock market and 61% of the time you spend in markets that go nowhere, you have to realize you spend a lot of time trading going sideways. Timing only adds value in 39% of the time spent in the markets . Dial up the patience and give the strategy time to have enough up, down and sideways markets to see how it deals with each type of market. If it does as exp ected, then stay the course. In addition, I find that many traders will abandon what they are doing when the going gets tough. I don’t know many traders that will stick out a 56+% drawdown, including me. So, from my experience as a money manager with cl ients and my experience as a trader, I can say that few I know stick around to actually experience a

1. Time Stocks Spent in Up, Down and Sideways Markets (2018 Update) By: Thomas F. Basso EnjoyTheRide.world Date: October 2, 2018 P urpose of the Study : In 1992 I did a study of how much time the market spends in up, down and sideways periods. It served several purposes at the time: 1. It put Trendstat’s name in front of the money management industry . 2. It once again showed the value of timing the market in reducing risk. 3. It h elped me personally be more patient when looking for returns from trading since most of the profits come from very small percentages of the total time spent trading and from a small percentage of the trades . How the Study Was done: The original study analyzed data from January, 1964 , to July, 1992. At the time , Trendstat’s m odels were too complex to explain easily, so I used a simple exponential moving average (EMA) crossover model to create buy and sell signals . For this update to the study I decided to create a fairly long - term , easy - to - execute strategy, using a 10 day EMA ver sus a 50 day EMA . W hen the 10 day EMA crossed the 50 day EMA to the upside, I rated that a "buy" signal. When the shorter EMA crossed the longer EMA to the downside, I considered it a "sell". I used only closing prices to keep it simple. I then broke down all these signals into up, down and sideways markets. To do this, I assumed that an "up" market was any "buy" signal that created at least a +5% return. Any "sell" signal in which the market declined by at least 5% was considered a "dow n" market. If a signal gave somewhere between - 5% to +5% return, the move basically went nowhere, so I rated the move a “sideways” market. I then ran the program against the data totaling the results by various measures. Exponential Moving Averages:

2. Le t’s digress a bit and define an Exponential Moving Average (EMA). First you have to calculate a weighting factor based on the number of days you want in the moving average. The formula for the factor is: Weighting Factor = 2 / (number of days=1) For a 10 day EMA the Weighting Factor = 2 / (10+1) = 0.1818 The EMA each day is then calculated by taking today’s close versus the average, time s the Weighting Factor and adding it to the previous day ’ s average. This adds only a fraction of today’s data into t he average. Example: The average is 110 and today’s close is 120. A 10 day EMA calculation would be: New EMA = 110 + 0.1818 * (120 - 110) = 111.82 Results: Up Mkt Down Mkt Sideways Total Buy & Hold Timing * Trades 31 16 366 413 1 413 % of Trades 7.5 1 3.8 7 88.62 100 100 100 Number of days 5767 1862 12007 19636 19636 19636 % of days 29.37 9.48 61.15 100 100 100 Return % 464.03 206.56 - 492.35 178.24 CAGR % +6.90% +4.36% Avg % Per Trade 14.97 12.91 - 1.35 Maximum Drawdown - 56.78 - 25.36 *Long only used in the timing calculation Note: The database used for the study is 54.75 years’ worth of data from 1/2/1964 to 10/1/2018


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