Warning: Following my trades may be hazardous to your financial health. See Disclaimer.

Friday, March 09, 2012

Mean Reversion

One of the trading styles is based on reversion to the mean, where oscillators reign supreme.  Prices don't go one way up or down but always go up and down, revisiting the mean.  Hence you have technical indicators such as STO, Bollinger Bands, etc.  Well, I believe there is mean reversion within an individual trader as well.

Don't tell me you don't follow any particular good trader(s).  Even if just for fun, we all do. I follow Dr. Fly because his blog is amusing to read and he posts his positions for all to see, even if it means making a fool of himself.  And he manages real money in the millions, albeit mostly other people's money.

Through February, his year-to-date return was north of 17%.  So I took his trades even more seriously. Although he's mostly in cash, since then most of his odd trades have been bomb shells after another, with the exception to TIF:  VXX, CPST, ALJ, and yesterday, QCOR.   Being bearish since last summer, of course I got more aggressive on VXX than I otherwise would, with Dr. Fly onboard.  CPST was in my IRA way before he got in.  And QCOR which he bought yesterday, is down over 6% overnight due to earnings.   At this rate, his year-to-date return will revert to mean, say, 7%, just for argument's sake.  And I would participate his demise in the process by following him. Even for a token trade, a 6% down in less than 1 day is still painful.


So if Dr. Fly has been too hot and the mean reversion argument is valid, then why don't I stop following his trades for a while?  Well, that was what I was thinking back in January when he was having a 7% year-to-date return in mere 3 weeks since the New Year.  Too hot to follow?  He's apparently made another 10% return in the next month.

This experience also illustrate another trading phenomenon, bagholding.   That's a sucker behavior.  That's when you don't get in because you have doubts, are afraid, and have little faith.  It's not until a miracle (e.g. a parabolic move) is shown to you do you become a believer and finally get in.  But by then, you got in with the dumb money and became a bagholder, as all the buyers have left the trade.  Sometimes when I am in a state of denial, I'd attribute this to the art of jinx. LOL.

I am writing this pointless musing as the market continues to froth higher.  SPY is up .6%, 20 cents from making a new high, while I continue to hold inverse ETF's.

UPDATE: Dr. Fly's new post, validating my claims.
I’m sorry but something is really ripping apart my brains here.
That was me doing %$#@ magic, making lots of money disappear, vanish into thin air like accountability when blogging.
As you can see by the swagger in my penmanship, I am getting cartoon raped in QCOR, ALJ, TZA and VXX today, while making a SINGULAR penny in CPST and nothing at all in TIF. All of this, despite my big, bountiful, and handsome, cash “hoard” has me sitting in the great big, tall grass, off by 1.25% for the day...

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