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Market Ups and Downs

A very popular stock trading technique is to watch prices closely and try to identify patterns as they emerge:

      ......a cup......a handle......a bunny......a stagecoach......

Believe it or not, this approach doesn't make sense. The market does show a pattern over the very long run, namely it grows like compound interest; but over the short run this pattern almost vanishes, drowned out by meaningless noise. The easiest way to see this is by looking at market data and just counting how often the market goes up versus down:

 

Date range:   through  
Frequency:  


 
Results
Data: Ken French

 

If your frequency is a year then you do see evidence of the long-term upward trend: the market has an "up" year about three fourths of the time. But if you shorten the frequency the trend almost disappears: if you check stock prices every day your chances of getting an up day are barely better than 50/50.

 

Stop Checking That Stock Quote

In Fooled by Randomness, Nassim Taleb argues that checking your portfolio too often doesn't just waste your time, it even makes you unhappy. The idea is that people feel more pain from a loss than pleasure from a gain; so if your gain to loss ratio is about 50/50, your pleasure index is basically under water. (Being in pain also makes you anxious to "do something" like churn your account, which is likely to hurt your returns.)

 

Article Contents
Market Abnormality
Significant Outliers
Ups and Downs
Long Term Risk
Momentum & Reversion
Crashes & Recoveries
Retirement Planning
MPT, VaR
Skill vs. Luck
Books & Links

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