the-daily-trading-coach-101-lessons-for-becoming-your-own-trading-psychologist-brett-steenbarger-_2009_-a23

308 THE DAILY TRADING COACHLESSON 91: USE HISTORICALPATTERNS IN TRADINGA trading guru declares that he has turned bearish because the S&P 500Index has fallen below its 200-day average. Is this a reasonable basis forsetting your trading or investing strategy? Is there truly an edge to sellingthe market when it moves below its moving averages?The only way we can determine the answer is through investigation.Otherwise, investing and trading become little more than exercises in faithand superstition. Because markets have behaved in a particular way in thepast does not guarantee that they will act that way now. Still, history providesthe best guide we have. Markets, like people, will never be perfectlypredictable. But if we’ve observed people over time in different conditions,we can arrive at some generalizations about their tendencies. Similarly,a careful exploration of markets under different historical conditions canhelp us find regularities worth exploiting.As it turns out, moving average strategies—so often touted in the populartrading press—are not so robust. As of my writing this, since 1980, theaverage 200-day gain in the S&P 500 Index following occasions when we’vetraded above the 200-day moving average has been 8.68 percent. Whenwe’ve been below the 200-day moving average, the next 200 days in the S&P500 Index have returned 7.32 percent. That’s not a huge difference, and it’shardly grounds to turn bearish on a market. When David Aronson testedmore than 6,000 technical indicators for his excellent book, Evidence-Based Technical Analysis, he found a similar lack of robustness: not a singleindicator emerged as a significant predictor of future market returns.Investigate before you invest: Common trading wisdom is uncommonlywrong.One way that historical patterns aid our self-coaching is by helping usdistinguish myth from fact. “The trend is your friend” we commonly hear.My research on the blog, however, has consistently documented worsereturns following winning days, weeks, and months than following losingones. It is not enough to accept market wisdom at face value: just asyou would research the reliability of a vehicle before making a purchase, itmakes sense to research the reliability and validity of trading strategies.There are traders who make the opposite mistake and trade mechanicallyfrom historical market patterns. I have seen an unusual proportion ofthese traders blow up. Market patterns are relative to the historical periodthat we study. If I examine the past few years of returns in a bull market,I will find significant patterns that will completely vanish in a bear