My original plan was to do posts on each of the seven strategies in Larry Connor’s new book High Probability ETF Trading. But after digging into the meat of it I realized that I’d be writing about seven variations of more or less the same strategy.
That isn’t in and of itself a negative comment. Connors’ approach to swing trading equity indices does work in today’s market, is similar in spirit to a lot of what I do, and goes something like this:
Go long at the close when the index: (a) is trending up in the long-term, but (b) has shown multiple days of weakness (in other words, a pullback in an uptrend). Reverse entry rules for going short.
The only real difference between Connors’ seven strategies is part (b), or how he measures those multiple days of weakness (or strength). Some Connors variations include: multiple days of higher/lower highs and higher/lower lows, or low/high RSI(2) and RSI(4) readings.
The Good
I want to be clear again that I very much appreciate Connors’ work (read my previous test of his TradingMarkets.com 10 Trading Rules). In an industry full of charlatans and snake oil, someone taking an honest empirical approach is always a step above the crowd.
The Bad
Having said that, I think it’s wrong to treat these seven strategies as seven unique widgets…they’re variations on a theme. They’ll tend to pick similar entries and exits and not provide the level of diversification that one might expect from trading multiple strategies because they live and die together.
We could describe a gazillion ways of measuring pullbacks in an uptrend on this blog, but we don’t. We try to find many, hopefully unrelated, approaches to trading that can compliment a good core trading strategy like any one of these.
The Geeky
One geeky, but I think important, critique: all of Connors’ strategies take a very binary approach to the market’s long-term trend.
I won’t give Connors’ specific rule, but in a nutshell, his strategies only go long when the index is above a long-term moving average, and only go short when it’s below.
That sounds good (“the trend is your friend” and all that jazz), but that puts a lot of weight on a single overly simple measure of the trend to determine whether your entire portfolio is net long or short.
The markets can be very bullish despite being below their long-term MAs, and they can be very bearish despite being above them. And that’s why I much prefer a confidence-based approach to trading (or what Condor Options called a “polynary” approach) that respects all of the shades of grey between being totally long and totally short.
Sorry for the head fake folks…guess I should read the WHOLE book next time before committing myself to a seven part series =)
Happy Trading,
ms
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Filed under: Random Stuff | 13 Comments
Its honest, straight-forward, unbiased posts like these that make (and keep) me a market sci follower/subscriber. Thank you for providing your true opinion and professional insight on this book vs fall into the “promotional pit” of lesser quality content. I read the book yesterday in anticipation of your review (via the digital copy) and was curious as to how you would present it in your blog. You continue to impress.
Michael,
I appreciate your review, however abreviated. As an enthusiastic follower of Connors work for years there does seem to be a frustrating level of oversimplification and redundancy in his systems and his recent forays seem more focused on marketing. As you attempted to document, anyone who actually intends to deploy these strategies with real money owes it to themself to verify Connors results over a variety of time frames using a variety of trading vehicles.
I agree that the book is simple, but I think the perception of redundancy comes from the expectation of this book as a complete rebuild of new trading information. It’s a quantifying of a relatively new trading vehicle.
RE to Nick: I disagree. He’s not “quantifying a new trading vehicle”, he’s describing strategies, no different (in spirit) to what we do here at the MarketSci blog. The difference is that he picks one single theme (short-term oversold/bought in an up/downtrend) and then shows multiple variations of that same theme.
“Quantifying a new trading vehicle” is showing the unique qualities of ETF trading versus some alternative (ex. the leveraged mutual funds that we trade). The book does none of that. For all intents and purposes, all of those strategies could be applied to the vehicles we trade.
Just my $0.02.
michael
you are absolutely right on all points—however to be fair, in trading ETFs it is very difficult to execute a pure polynary approach especially for small traders because of commissions and odd lot premiums etc. I believe that the use of scaling twice into positions in this book was an attempt to improve upon static buy and sell rules- and it does in fact improve results both accuracy and average gains. I think the primary mission that Larry has is to make things accessible and achievable for small and medium sized traders. On this point, he has definitely succeeded—most other systems/products are either too complicated and too difficult to execute or stick with in real life. His higher end products tend to involve more complex and polynary approaches. Nonetheless all of them still suffer from a lack of adaptibility which is the achilles heel in my opinion–which you also alluded to. In addition true diversification comes from inherent differences between what a system is trying to capture—ie trend vs countertrend. Or intermarket analysis vs seasonality etc.
dv
RE to Dennis: thanks for the kind words sir.
RE to BZB and David: agreed…not a lot I’d add…particularly David’s point about the book being targeted to smaller investors (and all of the logistical constraints that introduces)…I’m a little bit of a purist I’ll admit because we’re trading assets that are infinitely divisible and don’t incur per-transaction costs (which makes implementing a less binary system a whole lot easier).
michael
Michael and the rest,
I try to go out of my way to not be negative in these blogs…however I cannot
help but comment here. From the comments above and Michaels post…
bzbtrader…
“… there does seem to be a frustrating level of oversimplification and redundancy in his systems and his recent forays seem more focused on marketing.”
I totally agree and think bzb is being kind here out of respect perhaps? Trading Markets in my opinion has fallen into the abyss of charlatans and marketeers trying to re-package old, simple and known basics. So with all due respect Michael I have to disagree with your statement “In an industry full of charlatans and snake oil, someone taking an honest empirical approach is always a step above the crowd.” I have not considered these people above the crowd for some time now.
Darned it. and i just ordered the book from AMZN to test his theories as well. Wish i had known they are simply variations of a single theme…
RE to RedHue: duly noted and I feel your pain about the marketing shenanigans…I try though to stay a bit more positive because at the very least (tired ideas or not) they’re attempting to approach the market empirically, which is more than I can say for the vast, vast majority of the well-followed experts. Maybe I’m just jaded and have a low threshold for being impressed =)
RE to SmallFish: just one simple man’s opinion. The book is definitely still worth a read!
michael
Michael:
I am seeking a place where I can purchase some sort of “automatic” *ongoing* insurance against extreme short-term market declines. I posted about it the other day, but my post wasn’t approved. What happened?
RE to Ven: apologies for missing that comment – yes, this is something I’ve been thinking about and talking with some folks far smarter than I on options about, but no, I don’t (yet) have a formal solution. On the perpetual to-do list.
michael
I also think the review is being generous to Mr Connors. I purchased the book because of my strong interest in ETFs and received a slew of marketing emails repeatedly asking for people to send in their results of testing the main strategy on SPY, including what data provider and testing platform was used. Mr Connors said he would send out some insights to us afterwards. He never did. Maybe he just wanted this info for his own purposes. In the daily emails he sends as out as part of his service (free trial available to book purchasers), he says to email him with any questions. I sent him two emails with one or two short questions that have gone unanswered. The basic strategy can be found elsewhere if you look around for it on the internet. I tested out most of his Street Smarts strategies years ago, and never found them to work.
I read the book and also appreciate Connors’ approach for the small investor. I was able to program most of the strategies into an Excel spreadsheet.
Question: Does anybody have a suggestion of where / how I could locate the corresponding Wealth-Lab code ?