When to keep out of the market

When developing a system based on a bullish trend following one needs to make sure the system doesn't trade in a bearish market. This will help minimize the false trades which are bound to happen in opposite trends. To overcome this problem I needed to identify the market direction. My idea was to use one of the indexes as a gauge. Since the main market I trade (although the system performed well in other markets as well) I tried to use the Nasdaq composite (^IXIC) and its SMA to determine if we are in a bearish or bullish period. If the index moved under its SMA I would stop buying until the index moved back above its SMA. I also checked whether I should also close all my position when the market is turning bearish but that turned to be wrong and this is why I am keeping my current positions. The results were outstanding. The system's total profit for the test period improved by 100%. (the simulated period last between November 2002 and November 2007). I was trying to further improve the result by using the QQQQ instead of ^IXIC which turned out to be a good bet as you can see from a previous blog.

I was looking at historical data for the QQQQ to see how long did it stay under its SMA using my current system settings for the SMA period. In the crisis of 2000 the QQQQ had stayed below its SMA from September 2000 to November 2001, went up for 2 months and then dived for another 10 months. That's a long period were you're not buying anything and hopping you wont need to sell anything due to stop loss. But one cannot argue with historical data and statistics.

I hope the current recession will not hold that long but if it does  I will have to find something else to do with my spare time (as if trading on a weekly basis takes too much of my time).

Technorati Tags: nasdaq,computerized system,recession,stock market

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Reminiscences from a recession

Reading Paul B. Farrell column on MarketWatch and the comments that followed brought up some memories from the last years here in Israel.

It seems most people fear recession and its consequences. As someone who lives in a country which just came out of a rough period caused by a recession I can understand and relate to some of the emotions arise upon hearing the word "recession". As you might have guessed, I live in Israel. I work in the High Tech sector now and have been working as a developer in one of the public universities during the beginning of the recession period.

Following the Intifada back in 2000 (war between Israel and the Palestinians), economic growth had fallen from 8% in 2000 to 0% in 2001. Three years later, on 2004 following a deep recession, the government decided to execute a health plan. Among the steps which has been taken:

• Cutting monthly salary by 5% for all public workers (myself included) for a period of 2 years. This act was called "Economy encouragement wage".
• Raising the VAT for a period of one year.
• Budget cut for all public offices.
• Job cut in all public offices including government offices, universities, local council...
• Cutting health care allowance.
• Cutting national insurance allowance.
• Major cut in the security budget which you may not know, but here in Israel, due to the regular tension between Israel and its surrounding neighbors, security budget relative to western countries is big.

The predictions of the ministry of finance office talked about a rough period of three to four years which in the end will get us out of the recession and improve the financial state of all sectors.

Those years weren't easy for me and my family. I have lost my job as more than 15% of the working population had. Luckily I was able to find a new job soon enough but there were lot of people which were unemployed for a period longer than a year. A lot of families found themselves under the poverty line and organization who aim to help those in needs sprout all over the country. Many factories and companies were bankrupt and things didn't look too promising.

Looking back, these weren't happy days but I believe they were necessary to bring us to where we are today with an economic growth of 6.6% only after three years.

It's a painful process but at the end of it lies a brighter future for all. I believe recession is cyclical in western economic societies and thus inevitable. All you can do is plan ahead for these times.