Long-Term Trading Strategy That Should Work

Discussion in 'Trading' started by kenwx23, Feb 7, 2012.

  1. kenwx23


    I am aware that our markets have not yet recovered their highs from a few years ago. Other markets like Japan's haven't recovered from the 80's.

    But let's say you have a hypothetical account size - $500,000. Then assume worst case scenario for the US market is a 50% drawdown. I realize we dropped farther in 2009, and I'm not saying it won't/can't happen again. For the sake of this example, it won't matter. SPY closed at $134 and change today, so we'll use that as our starting point. When it drops by certain intervals, we buy. Whatever that interval may be determines your buy size. Say it's a $1 interval. Assuming 50% worst case drawdown, that's a potential $67 fall. So, $500,000/67 intervals = almost $7500 per buy. For every $1 fall in the SPY, you'd buy $7500 worth of shares.

    You sell when you get back to your starting point. In this case, $134. Then you start over and wait for the falls again. If today's $134 is the high on the SPY before a fall to $67, well, you'd eventually be in at an average cost of about $100 and theoretically out of money. Unless you kept a % of your assets elsewhere for some diversification. Probably smart. Of course the $1 increment could be 1% or 5% and maybe you progressively buy higher amounts on the way down, whatever. It's just a most basic averaging down strategy if there ever was one. And I realize that. But from a long-term perspective - no day-trading here - what else can you really do to avoid buying high and selling low? That is if you sell at all. Not really the point of a long-term strategy I guess.

    You also collect some dividends on the way back up. Seems they can add up over time. Had to wait quite a few years for SPY to get back to the 150's from the 2000 high to 2007. But you collected something like $12/share in dividends from the 2002 bottom to the 2007 top.

    Just rambling. But also looking for a long-term investment strategy that makes some sense. Not a huge fan of buy and hold over the next 20-30 years. That's the most typical advice I hear. But boy I'm glad I didn't do that back in 2000 or 2007.
  2. Maverick74


    This has been discussed ad nausem on this board. It's a martingale and it doesn't work. One of two things happen, over the long term you will either earn less then the risk free rate of return in a stable market or you will blow up. This has been tried thousands of times since the beginning of time.
  3. Buy and hold doesn't mean put 100% into Nasdaq and pray. 40-50% stock indices (mix of sectors, including international stocks etc), 30-40% bonds, 10-30% commodities, gold, REITS, dividend plays etc. would have done OK even if your initial timing was awful.
  4. kenwx23


    Thanks for the response, but doesn't a martingale demand exponential growth of your bets? I'm not necessarily talking about that, just averaging down using pre-set intervals and pre-set amounts. In the example I gave it forces you to always be in the market at about 50% of the full leg down.

    By "risk free rate of return" do you mean buying US treasuries or just buying and holding? And I don't see how you could blow up unless you were using leverage or the market dropped significantly and never recovered. Though my assumption is that is still does not go to 0.

    I'm tinkering with this stuff in search of a money management and position sizing strategy that will work long-term irrelevant of the direction of the market. Key word being long-term...inclusive of dividends, inflation, etc. Actually Mav I've read through a lot of your discussions about ACD. Got the book yesterday and I'm about half way. It's very interesting, and I'm sure the methods can be used to formulate a long-term strategy.
  5. lol seriously?

    I've got a brilliant roulette strategy I can sell you for 3k and it will make you twice as much, twice as fast. Giggity OHHHH YAAA!!!
  6. kenwx23


    Can you find a period of time in history where this would have failed to make money long-term?
  7. Maverick74


    Yes. Lots!!!! LOL.
  8. Op it is a Martingale. Once you assume the market can't or won't do something it will more than likely do just that. Have you thought about the possibilty the market goes nowhere for 30+ years? Or what if the market trades down 50% and then trades sideways for 15+ years? Have you looked at how this strategy would have performed in any past bear markets? How does it fair against inflation?
  9. kenwx23


    So there are and have been "lots" of occasions where the broad US markets have not recovered at least half of a 50% drawdown..

    I need to find these occasions.

    Seriously, I'm not trying to troll or flame anyone here. It's just a question and I'm looking for an example and not wisecracks to shut this line of thought down.
  10. kenwx23


    Totally agree with the assessment that the market could trade down 50% and then trade sideways for 15+ years. Martingale implies increasing bets on the way down. It's not Martingale, but I see why the comparison is being made.

    As far as comparing it to past bear markets, the only peak that has yet to be recovered is 2007. But I'd still be up even if I used the peak. I have not considered inflation, that's where just buying and holding would prevail, but not if you get a 50% drawdown and sideways trading for 15 years..
    #10     Feb 7, 2012