Prudent Trader Newsletter
Blog Posts You May Have Missed
- Insider Activity by Sector
- Stan Weinstein’s 30 Week High-Low
- Gerald Appel’s Triple Momentum Signal
- Advancing-Declining Volume $ Weighted
- Index New Highs and Lows [One Month]
Acting on Impulse
Impulsive people have a way of reaching conclusions and taking action that, in comparison, with normal deliberations and intentions would be considered impaired. Acting on a whim, giving in to temptation, doing what you have told yourself, time and again not to do, is acting impulsively. Impulsive people are not self-confident but simply hope and wish for results. Quite simply they have no long-term goals, within which trades and management should be planned, only immediate urges. Their behavior is abrupt and unplanned. The time between thought and action is very brief.
The net outcome of unplanned behavior is when failure occurs, the process of analyzing bad trades malfunctions. The person cannot accrue effective lessons from the loss. Without a plan, impulsive people can’t develop methods to determine what works and what doesn’t. They can’t understand why they failed.
Impulsive people are also deficient in a certain method of thought process. Normal people weigh, analyze, research and develop an initial impression. Impulsive people guess and bet heavily without much thought. Impulsive people are often victim blamers. The results are reflective of character and personality, not intelligence.
Victim blamers tend to interpret anything in life that doesn’t go their way as somehow aimed against them, believing somebody or something is working against their welfare. It may be a boss, a girlfriend or an entity such as a company or the government. Or it may be outside forces such as “bad luck,” “nature,” “evil forces”. They never learned to assume personal responsibility for their own actions vs. blaming others. While everyone tends to lapse into blaming others at least sometimes for their misfortune, this trading type makes blaming their primary defense mechanism to deflect their own sense of urgency.
Because they are looking for someone to blame for their investments that lose money, they are among those most in favor of intense governmental investigation and prosecution of market manipulation of any kind. With each fresh uncovering of company accounting fraud, brokerage-analyst duplicity, insider trading or any other type of market manipulation, they smile and say, “See, I told you they’re all out to get us!” But this only tends to make them feel more helpless and assume less responsibility for their own investing decisions. If you have a tendency to be impulsive, the cure is to put together realistic and sound goals along with a realistic trading plan. Make yourself work towards the attainment of those goals by not violating the rules of your trading plan.
The Stochastic RSI indicator
The Stochastic RSI was introduced by Tuschar Chande and Stanley Kroll in their December, 1992 Stocks and Commodities article entitled, “Stochastic RSI and Dynamic Momentum Index”, the Stochastic RSI Oscillator attempts to combine ideas from two indicators – the Relative Strength Index (RSI) and the Stochastic Oscillator. As its name implies, the Stochastic RSI Oscillator is the RSI run through the stochastic algorithm. The Stochastic RSI Oscillator is a momentum indicator designed to show the relation of the current RSI value relative to its high/low range over a given number of periods using a scale of 0-100.
The Stochastic RSI Oscillator is calculated by the formula:
StochRSI = ((Today’s RSI – Lowest RSI Low in %K Periods) / (Highest RSI High in %K Periods – Lowest RSI Low in %K Periods)) * 100
The Stochastic RSI Oscillator can be used to identify potential overbought and oversold conditions in price movements. An Overbought condition is generally described as the Stochastic RSI Oscillator being greater than or equal to the 80% level while an oversold condition is generally described as the Stochastic Oscillator being less than or equal to the 20% level. Trades can be generated when the Stochastic RSI Oscillator crosses these levels. A buy signal occurs when the Stochastic RSI Oscillator declines below 20% and then rises above that level. A sell signal occurs when the Stochastic RSI Oscillator rises above 80% and then declines below that level.
In my recent readings I came across a code that utilizes a double exponential moving average (there’s a mouthful) as a trigger for using the Stochastic RSI as a trading system. When the Stocahstic RSI crosses this trigger a buy or sell is indicated. Similar to the idea of a signal line on the MACD indicator. Let’s test this idea on SPY and see what happens.
Utilizing the ETF SPY as our test ticker, a 10-year test period from 1995 through 2005 (2005 shown above) as our sample data, and then another test from 2005 through present to see if we have major differences in the results, keeping in mind one test encompasses approximately twice the time period of the other.
The percentage of winners and losers remained pretty close over both tests however the compounded annual return dropped significantly, average profit about half, the compound annual return divided by the maximum drawdown (Ed Seykota’s Bliss number) much lower than the original test.
Conclusion: the inefficiency this system was uncovering during the original 10 year period, at least as far as SPY is concerned, has been diminishing. These two tests were from the long side only and no trend filter has been added. This is important because a mean reversion system such as this, usually works best in trendless or sideways markets, and fails miserably in trending markets. I am sure that no one out there would like to trade this system as is however, it is possible that it could become part of, or the basis of an affective trading system. Food for thought!
Have a Great Week!
Bill
Prudent Trader.com
Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.