June 13, 2017

It might be hiding in plain sight. In my last article: No Alpha No Game it was stated it was a sufficient condition to have an upward bias in the price data to win a long-term stock market game.

Often times, people want to look at the game as if randomly set, meaning that the probability of going up is about the same as going down. As if playing a heads or tails game. A game known for centuries to be a zero-sum game and unbeatable except by luck, when, in fact, the stock market game might be something quite different.

The picture below surely does corroborate a 50/50 argumentation. Over the past 5,473 trading days (21 years), about half were up days. Within statistical tolerances, it is saying: 50/50 odds. With such a chart, one could indeed consider it a zero-sum game.

#1   UP and DOWN Days

(click to enlarge)

However, no one is forced to trade as if it were a casino game. They can, and some do, but nobody forces them to do so. If they do, they should realize what the odds are and stop complaining that they do not win so much over the long haul.

They could, for instance, naively wait for a profit to materialize. It is a continuous betting game, and one could leave his/her chips on the table over some time interval. Doing so can change one's perspective. The question then becomes:

How many days in the past could I have been profitable taking a long position?

That is a very simple question to answer. Draw some lines on a chart and get a visual representation.

I used the same chart as above and took a snapshot of what was visible on my monitor (18 months). ABT was the first symbol in my folder, and it could easily serve as an example to make the point.

#2  Profitable Days

(click to enlarge)

From the above chart, one could have taken a position in any of the past 427 trading days and would have made a profit just by holding on.

It could have been done on any of those days multiple times, and each would have resulted in a profit. The profit would be there just for having waited for a better day to exit a trade.

Of the 5,473 trading days, which represent a sufficient statistical sample, 5,395 were below the last price on the chart. This means that 98.57% of all prices in the ABT 21-year history would be showing a profit just for having held on.

It was not a question of gambling in a 50/50 world. It was buying a stock that is prospering over time and giving it the time to do something for you.

Sure, you can gamble that tomorrow will be up. But do you absolutely have to or need to?

Sounds like just giving a prospering stock some leeway and selecting a sell day when it is profitable for you would appear more appropriate. And looking at the above chart, it could have been done many many times. One could have scaled in and out of position as each position was showing a profit.

Thereby profiting from price fluctuations without predicting price movements, but still taking advantage of them. Without using any indicator, or whatever contraption, and nonetheless pocketing the profits.

What you want from an automated stock trading program is to have a machine do this for you.

Of note, ABT was not an exception. It might be at the top of the list in my DEVX8 folder, but it does show about the same behavior as the other nine in the list, including DIA serving as the benchmark. Here are the summary statistics.

#3   Summary Stats

(click to enlarge)