When Shorting Works: Short vs Intermediate-term Timeframes
My random epiphany for today…
Back when I was just the quiet developer of the original MarketSci strategies, I used to only trade long because I thought that the markets were much easier to play long than short. I was right…and I was wrong.
You see the original MarketSci strategies play in what I call the intermediate-term timeframe. The “intermediate-term” is a concept more than something I can specifically put my finger on, but generally speaking, I define it as indicators that are between a week and month in length.
Examples might include: TM’s buy new lows not new highs, Condor’s VIX-based strategy, and the two proprietary indicators on the State of the Market report.
I think that in this intermediate timeframe, the market is very difficult to short. Maybe it’s because of the general positive drift in the markets, or perhaps it’s because of the volatility of moves up vs down, but in any case, I’ve never seen an intermediate-term strategy that has shorted well consistently.
Today however, my tune is very different after developing and living with a handful of very successful short-term strategies: YK, Scotty, and RH. In those cases, our shorts have become about as effective as our longs, because we’re taking advantage of very, very short-term technical overbought/oversold conditions.
Other examples here might include: adaptive daily follow-through, or extreme RSI(2).
The point of all of that is to say that my new grand unifying theory reads something like this:
Long profits can come from multiple places – long-term trend-following and reversion to the mean in both intermediate and short-term timeframes. But predictable short profits tend to only come from very short-term (read: technically-driven) mean-reversion.
Of course, these markets are constantly evolving and this is all subject to change with a portfolio-crushing lack of notice.
Happy Trading,
ms
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Filed under: Trading Strategies | 2 Comments
In “Methods of a Wall Street Master” Vic Sperandeo talks about three trends: short-term (days to weeks), intermediate-term (weeks to months), and long-term (months to years). All 3 are always active and may be moving in different directions.
This is seemingly borrowed from Rhea’s original “Dow theory”.
There’s some pretty interesting stuff in the book about identifying points of trend change. He talks about shorting at points of intermediate and long term “tops
… but, as I recall, the shorting was short-term in time frame, though it was based off an intermediate-term trend following.
I don’t recall all the details now … but it was a worthwhile read. It wasn’t all strictly technical analysis … and I remember wondering if it could be turned into an algorithmic system.
Well, BrianB, you’ve come to the right place to ask such a question!
By the way, Michael, I *love* this website. Thank you very much for providing such a wonderful service!