Tactical Solutions: The Trend Indicator
Updated Dec 2022
After 2008, market manipulation took on a whole new meaning. Every piece of financial data that could be manipulated was manipulated. As we knew them, free market forces ceased to exist. Because of what would eventually become known as forever, QE became the primary support system for the economy and the stock market. Hence a new tactical solution would need to be found to deal with a call that no longer follows the old way of doing things.
This tactical solution would only have to focus on psychological indicators and price action. Focusing on fundamentals would be a waste of time, as critical factors such as EPS would be manipulated to the extreme. As a result, the fundamental analysis would eventually be on par with rubbish. Fortunately, at the tactical investor, we had already been working on something like this for years, and the financial crisis of 2008 meant we would now have to complete this project in record time.
The Trend indicator identifies Market trends in advance of the event. In other words, it alerts us to when a market is about to experience a change in trend. Do not confuse this with timing the exact top or bottom of the market; such an endeavour would not qualify as a tactical solution but would fall more under the lines of stupidity or a tactical blunder.
Tactical Solutions: Focus on Mass Psychology
We wanted this indicator to utilize data that could not be easily manipulated. After the financial crisis of 2008, essential data such as volume, market internals, the number of new highs or new lows, moving averages of new highs or new lows, advancing or declining issues and a host of other data that was being manipulated.
Volume is one of the critical backdrops of most technical systems. Thus we wanted a system that would never rely on such indicators or any other data that could yield false signals. We wanted a tool that focused on price action and vital psychological components but was also highly accurate; the tactical solution was the trend indicator that answered this problem. Since being put to use, the Trend Indicator has never missed a Major Market Top or Bottom. Back Testing it with 50 years’ worth of data revealed an accuracy of over.
Pigs always get slaughtered.
There is a saying in Wall Street that bears win sometimes, and Bulls win sometimes, but pigs always get slaughtered. The point we are trying to make here is that our goal is not to spot tops or bottoms or fixate on trend lines and worry about when the stock might or might not top or bottom. Our goal is to enjoy the ride up and or down until the signal changes, and that is it. With this strategy in place, investing is a highly pleasurable venture as one can identify market trends in advance.
Once again, we would like to reiterate a Tactical Investor never attempts to time the exact top. If we do happen to time the actual top, we assign that to lady luck. Tactical Investing is all about getting when an asset class is hated or being ignored by the crowd and that given asset is trading in the highly oversold range.
Tactical solutions in the realm of investing
Applying mass psychology can be a powerful tool for traders looking to gain an edge in the markets.
One study that highlights the effectiveness of mass psychology in trading is “Market Psychology in the Stock Market: The Role of Investor Sentiment” by Baker and Wurgler (2006). The study found that investor sentiment, which is a measure of mass psychology, has a significant impact on stock returns. Specifically, the study found that high levels of investor sentiment are associated with lower subsequent returns, while low levels are associated with higher following returns.
This research suggests that traders who can gauge market sentiment and use it to inform their investment decisions may be better positioned to generate market profits. Additionally, by understanding the emotional and psychological factors that drive market behaviour, traders can develop strategies that capitalize on market inefficiencies and mispricings.
Another study that underscores the importance of tactical solutions in trading is “Tactical Asset Allocation and Market Efficiency” by DeMiguel, Garlappi, and Uppal (2009). The study found that tactical asset allocation strategies, which involve dynamically adjusting portfolio allocations based on market conditions, can generate significant outperformance compared to a static buy-and-hold strategy.
By leveraging tactical solutions such as mass psychology and tactical asset allocation, traders can gain an edge in the markets and potentially achieve higher returns. Of course, it is essential to note that there are no guarantees when investing. Any strategy should be thoroughly researched and tested before being implemented in real-world trading.
Research
Links to the studies mentioned above
- “Market Psychology in the Stock Market: The Role of Investor Sentiment” by Baker and Wurgler (2006): https://papers.ssrn.com/sol3/papers.cfm?abstract_id=891170
- “Tactical Asset Allocation and Market Efficiency” by DeMiguel, Garlappi, and Uppal (2009): https://www.nber.org/papers/w14733
Additionally, here are some articles that verify the effectiveness of tactical solutions in trading:
- “How Mass Psychology Drives Stock Prices” by Adam Hayes (Investopedia): https://www.investopedia.com/articles/active-trading/070915/how-mass-psychology-drives-stock-prices.asp
- “The Tactical Advantage of Tactical Asset Allocation” by John Reese (Forbes): https://www.forbes.com/sites/johnreese/2016/03/08/the-tactical-advantage-of-tactical-asset-allocation/?sh=71240f431257
- “Why Contrarian Investors Win” by Vitaliy Katsenelson (MarketWatch): https://www.marketwatch.com/story/why-contrarian-investors-win-2012-04-18
I hope these resources provide you with further insight into the benefits of tactical solutions in trading.
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