Trading Success Lies on the Other Side of Fear
* Since late 2006, when I first began collecting these data, when the put/call ratio across all listed stocks was in its highest quartile, the next five days in SPX have averaged a gain of .43%. On all other occasions, the average next five-day return has been +.04%.
* Since late 2006, when the number of SPX stocks making fresh five-day highs vs. lows has been in its weakest quartile, the next five-day return has averaged +.45%. Across all other occasions, the average next five-day return has been +.05%.
* Since late 2006, when VIX has been in its highest quartile, the next five days in SPX have averaged a gain of +.22%. Across all other occasions, the average five-day gain has been +.11%.
* Since late 2006, when the percentage of SPX stocks trading above their 5-day moving averages has been in its weakest quartile, the next five days in SPX have averaged a gain of +.46%. Across all other occasions, the average five-day gain has been +.03%.
* Since late 2006, when the percentage of SPX stocks trading above their 20-day moving averages has been in its weakest quartile, the next five days in SPX have averaged a gain of +.34%. Across all other occasions, the average five-day gain has been +.07%.
One trader sees the market move higher for a few days and puts in an order to buy, fearful of missing a big market move.
One trader sees the market move lower for a few days and enters an order to sell, fearful of missing the overdue crash.
One trader sees the market move lower for a few days, fears a debilitating drawdown, and stops out of a long position.
All three traders lose money over time. Entry and exit execution predicated on fear have negative expected return.
Indeed, the results of acting on fear are so poor that they're promising.
Trading success lies on the other side of fear.
Further Reading: Making Fear Your Friend
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