Trendiest asset classes

Discussion in 'Strategy Development' started by stevenpaul, Jun 18, 2009.

  1. Hi Traders,

    What types of securities or sectors within a given asset class do think exhibit the greatest tendency to trend? Gary Smith, in __How I Trade for a Living__ suggests that junk bonds, and funds comprising them, trend better than funds of other asset classes. "They either go straight up or straight down," he writes. Having read that, I had to ask myself if junk bonds are the trendiest avenue, or if there is something that moves with even more commitment. Smith suggests that a 2% move in junk in either direction is indicative of considerably greater movement to follow, affording an opportunity for scale-up buying à la Livermore and Darvas. Without examining the validity of that thesis, it's clear that life as a trader would be easier if all markets behaved that way. My question, thus, is what asset classes move like that: an initial nudge and we're off to the races. The choices are countless: forex (and if so, which pairs, or does it matter?), treasuries, emerging markets, the tech sector, oil, the softs? This question calls for gross generalization, I know, but if some markets are typically, or even just often trendier than most, it would be great to know about them. We already have Gary Smith's vote, so what's yours?
  2. Usually, an instrument that trends on a regular basis, does so for several reasons which may not be apparent to "outsiders".

    1. The commission to trade it is very expensive.
    2. Exchange/clearing fees are very high.
    3. Spreads are very wide.
    4. The technology used by some participants is very slow.
    5. Government taxes on each trade.
    6. Low volume/liquidity.
    7. The exchange/govnmt rules mandate a certain "order" in price.
    8. Sometimes shorting may not be allowed.

    Any 1 or 2 of the above is often enough to have a "trendy" instrument.

    But you need to study it and make sure that you *can* indeed trade it in a profitable way after taking those handicaps into account.

    Most often you'll find it either a temporary thing, or that for one reason or another the above issues cannot be overcome.

    As soon as those problems begin disappearing, the instrument becomes less trendy to adjust to more participants joining the game.

    As far as Gary Smith's book, while a wonderful book at the time of printing, much of it is irrelevant today. In fact, 90% of trading books written over a decade ago are worthless. Yes, there's a "nugget" here & there but mostly outdated. The markets have changed a LOT since then and continue to change.

    btw, generally, and this correlates with what I wrote above, the more popular an instrument is, the less trendy it becomes (emini s&p). It's usually lesser-known things that "trend" more.
  3. I'd be interested in knowing your source for those criteria. In any case, many of them would seem to describe the nature of exotic currency pairs, i.e. the wide spreads and lower relative volume. Do you think pairs like AUDJPY might prove more trendable than, say the EURUSD, which is certainly the most liquid of all the pairs? AUDJPY has made a huge run over the last four months. Maybe this is what you're talking about.
  4. The issues I quoted above, generally do not apply to any of the G8 currency pairs. Those are all liquid instruments with no barriers to trade, although I wouldn't really characterize them as "trendy".

    I was mainly referring to the fact that many times traders look a chart of some stock or other asset and imagine "entering here...exiting there", wow! look at the profit potential...if I could just figure out this trending market/instrument!

    That's where the above applies. You need to research the character/reason for the behaviour of any tradeable prior to executing any trades. (Well, that can sometimes be part of the research too).

  5. 007Arb


    >>>As far as Gary Smith's book, while a wonderful book at the time of printing, much of it is irrelevant today. In fact, 90% of trading books written over a decade ago are worthless. Yes, there's a "nugget" here & there but mostly outdated. The markets have changed a LOT since then and continue to change<<<<

    Thanks, I think. I am hardly one to defend my old books, especially the first one about daytrading the stock index futures. That book in fact is beyond outdated and I wish the publisher would retire the darn thing. As for the second book, I am not so sure it is *that* outdated other than some of the daily momentum patterns I formerly used. We agree, markets change and traders need to change with them. However by far, 2009 is the best trading year I have ever had on a dollar basis. And it is all due to junk bond funds and emerging markets bond funds and their persistency of trend combined with their lack of volatility. It's the exact same principles (tight rising channels) I used with them in the 90s, 2003, and today, so at least in bond funds, not much has changed. Why I prefer trend persistency combined with low volatility is that enables me to put my entire trading capital at risk, something I could never do while trading futures or equities.
    fortydraws likes this.

  6. Hi, would you mind mentioning some of the funds that you trade?
  7. 007Arb


    I would have had an even better year had I been trading the closed end junk and emerging markets funds but they are a bit more volatile (because they trade intraday as well as trading at premiums and discounts to their NAV) instead of the open end funds. And even though I have traded these open end funds this year and late last year that is a bit of a misnomer since when these things get in a trend mode, trading them in and out is counterproductive as opposed to just sitting tight and enjoying the ride. Anyway, in emerging markets this year it has been FNMIX and in junk several ala BJBHX, SSHYX, NHINX. With but a few rare exceptions such as FNMIX, I stick with the few left that have no short term redemption fees. If there is definitely one thing that has changed over the years it is that the fund companies police active fund traders like myself more diligently. A few fund companies have banned me because of trading too much over too short of a time frame.
  8. clacy


    That's interesting. I'll look into your book.

    Can you short these bond funds? Or are there inverse bond etf's?
  9. you want trendy? go with trading the softs...low volume yes, but trendy, definitely. Coffe, OJ, Cocoa, Cotton, etc.
  10. 007Arb


    No you can't short open end bond funds (the ones that are priced once daily on the close) There is an inverse junk bond fund but it is a dog and way underperformed how it should have in last year's bear market.
    #10     Sep 15, 2009