Cycle Traders Are Stupid

Have you ever been told by traders that they are trading based on a cycle? As long as the cycle is trending positively they long, and when the cycle ends, they short? Have you ever been told by traders that they are just following the trends rather than setting them? Ever heard the expression “don’t trade against the trend” or “don’t try to catch a falling knife”? So, called “cycle traders” who just follow the market are, in my opinion, stupid money and full of hot air.

When they say what they say, the essentially mean to say that they buy when the price is low and sell when the price is high. If you are a trend-follower who trades based on his guesstimations that the cycle is either over or not, you are essentially buying because you think the price is still to climb further, and if you are selling because you think the cycle is over you reckon the price will further drop.

That’s not very different from any other trader on the market, isn’t it?

We all know the market works in cycles, but these are ultra-complex cycle that are caused by an almost infinite number of variables, some of which are very hard to measure (like sentiment). So, saying that you can predict where the cycle is heading is as if you said, “I know where the market is heading”, which is fine, we all trade because we somehow think we can beat the competition, but none of us says confidently that he “knows” which way the market is heading. We are making educated bets on where the market or a certain instrument is heading in the same fashion that any other retail trader would, we just try not to be presumptuous about it.

The reason I think this kind of trading is “stupid money” or at the very least short lived is that you don’t benefit from most strong upward market movements, but you are definitely in a position to feel strong daily movements if you are trading in this fashion.

Let’s have a look at the SPX ETF graph of last week from Investing.com

If your trading strategy is to only enter after say 1 day where the market moved at least 0.2% up, you would have entered on October 20 just to suffer a much larger decline in the days to follow. Then, as the market hasn’t shown anything, you would have stayed out, and not benefit from Nov 1’s massive increase. If you would have entered just for Nov 2, you would have suffered a massive increase, get out of the market, just to miss out on Nov 2’s mid-day correction which push the market back more than 5 points.

If you are getting my drift, my intention is to show that previous day’s results’ correlation with today’s results is very faint. If anything, it would be a reverse correlation! That method of trading means that you will be missing out on large upswings (because they occur normally when the market is on a downward trend), but suffering all the large downsizings.