Trader Mike

In writing How Markets Really Work: A Quantitative Guide to Stock Market Behavior (buy from Amazon.com) Larry Connors and Conor Sen (son of fellow blogger Ron Sen, MD) set out to do for the stock market what Moneyball did for baseball — debunk conventional wisdom trough the use of statistical analysis. This quote from the book sums up their goal for the How Markets Really Work:

If baseball has quantified mainstream parts of the game such as batting average, on base percentage, errors, steals, walks, etc., why hasn’t Wall Street done the same with the indicators which it relies upon every day? Trading day after trading day, we are bombarded with information from the …

Larry Conners has written a follow-up to his article from last week on breakouts vs. pullbacks — Do You Buy Breakouts? Think Again (Part 2). The results are very interesting.

(Again, I’ve archived the article here)

TradingMarkets.com has posted an interesting study comparing the results of buying breakouts to buying pullbacks. The results are rather surprising to me. According to the methodology used in the study you would make more money shorting breakouts to new highs than buying them. Although I’m not a big proponent of buying breakouts I can’t help but think this study is flawed. The first thing that comes to mind is the money management aspect. Most breakout traders are pretty aggressive. The good ones would likely not just leave a trailing stop below the 10 day moving average like was done in the study. They would be locking in their gains and not letting significant profits turn into losses. It’s the exits that make/lose money, not the entries. I’d like to see a similar study done with different exit strategies.

Here’s the complete article: