This is the time of year when one cannot avoid seeing lists of predictions and New Year's resolutions. I even contributed by producing my own list of quasi-resolutions last week. By far the most common resolution or piece of market wisdom that I have been reading is some variation of don't try to outsmart the tape/the trend is your friend/don't fight the tape. Like many Wall Street sayings there is some validity to it. But I have found that when everybody is spouting the same truism or looking at the same indicator, there is a high probablity of it failing.

The past year has been a boon for trend followers/momentum investors. The market has had very defined moves all year with little deviation from the prevailing trend. "After" this banner year for trend following everybody is now converted. There is a self reinforcing cycle as more and more people adopt a specific strategy but eventually it becomes a self defeating cycle as the hot money abandons the strategy.

I make a living by fighting the trend. Most stocks I buy have charts only a mother can love. The reason I believe most people fail when trying to fight the trend is that they don't have a methodology for picking their spots. Before fighting a rising market I try to wait for bullish sentiment to become extreme and for the move to be exhausted. I employ similar tactics in buying a falling market. Many just go with their gut or data mine.

2010 had opportunities for traders like myself because the extremes were very extreme and as long as one had patience and perseverance there were some good opportunities. But it was not the easiest year for mean reversion traders. While everybody is converting to trend following strategies, I am sticking with mean reversion.


Anonymous said...

do you ever ride a trend once you're in. livermore said the big money is made riding trends, not taking 2% off the top or bottom.

Tsachy Mishal said...

I often sell positions in stages. In a straight up market it is much harder for me to stay in for the entire trend.

In a two steps forward, one step back market it is easier to capture more of the trend as I am given the chance to reload.