Consider, say, 5 related macro markets, one of which is the dominant market in terms of influence upon the other four.

Further assume that your own individual Rosetta Stone tells you to buy the 4 less dominant assets first but the same methodology doesn't get long the main market until later in the microsecond, second, minute, hour, day, week, month, year. (my we are inclusive of all on this site, aren't we!)

Anyway, the issue to consider is this:

Is it more efficient to buy all 5 assets only when the 'influential' asset signals? The qualitative argument being that if the influential asset keeps declining then one should wait on the other four.

After an enumeration here, and considering the relatively short holding periods concerned, it makes more sense to just do all the trades as they occur, 'influential' market be damned.

In terms of percentage attribution of profit or loss amounts there appears to be no persistent profit from waiting. An interesting question might be, is it a good idea to add to the other four when the main market signals….

In the context of relatively short term trading, there appears to be a plethora of cross market vicissitudes– more than enough to compensate for not having the support of the 'main' market.

Bill Rafter comments: 

If "the Four" always lead "the Main", then the Main as a signal is irrelevant for the Four. The Main then should always be bought ahead of its signal (which is a foregone conclusion). This is aside of any portfolio/diversification/size considerations. If you waited for the Main you would seem to be missing some profit on the Four. As you stated, there seems to be no profit in waiting. You should therefore treat the Main as an independent signal on its own.

Be cautious that you have not stacked the deck against the Main. A silly example (but one practiced by many) is to have one signal determined by looking back over say 20 periods, and another looking back over 40 periods (or 5-minute bars vs. 30-minute bars). In this example you will have stacked the deck in speed against the 40-period/30-minute lookback. The novice then claims he needs to wait "for confirmation". All he has done is to nullify the earlier signal. If the earlier one is always/mostly right, his process is inefficient.

Two other considerations:

The use of signals in some markets to trade other markets. The common example here is to use the inverse of bonds to generate an equities signal. Be aware that signals of "opposite" markets rarely occur simultaneously. Some traders would benefit from knowing which comes first, the exit or the new entry. Think about it: it should be obvious.

Our experience is that some signal always leads, but the leader changes. And of course there are false positives. One solution is to have them vote, but in doing so you will always be after the leader. Considering that the greatest improvements in track records come from the reduction of losses rather than outright gains, it seems prudent to trade a little of the upside for less downside. But that is for each to decide, hopefully after testing.





Speak your mind

2 Comments so far

  1. Andre Wallin on February 11, 2015 11:28 pm

    When i see the elderly i wonder how they reach that point without losing their minds. I guess as the nazis ironically said ‘arbeit macht frei’ while your aspirations and fears may enslave you. How can some poor soul turn on the TV or read anything online without being fed a false destiny not inline with themselves. It’s all bringing us away from ourselves as we cease to look with in. Electric shocks for the poor lonely soul grasping for something anything in a changing world and your changing self like two passing cars going in opposite directions.

  2. Andre W on February 12, 2015 6:12 pm

    The human mind seeks dichotomy in everything. Some see everything in God’s hands others are atheists both are wrong. The trough is always in the middle. Debate and beliefs on the ends of an argument are stupid but they entertain you. Now the debate of technical analysis is over. This belief system has led to Victor’s failures while his more flexible partners won. Rigidity in beliefs is horrible always seek the middle, meditate on the middle, realize that every emotion is falling to one side or another and is missing the middle mark. Its so hard to find the zen spot. US culture is tilted towards life and the east tilted towards death. Isnt the best life and emotions found in the middle?


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