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Trading strategies that work

Created:
2 June 2008
Updated:
17 June 2008
Written by:
Simon Thompson

So much about investing is subjective, like whether shares are cheap or expensive, or whether oil is likely to go on rising, or fall back. That's why I spend a lot of my time looking for trading strategies that strip out human judgement and rely on history and statistical analysis. I'm doing what any successful gambler would do - shortening the odds as much as I can. Here are some examples. You'll need to be an IC Advantage subscriber to read the full versions of these articles.

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Follow the Fed

My column today is about how to use the US interest rate cycle to time investments. You might think that US markets climb when the Federal Reserve is cutting interest rates, and fall when it's increasing them. In reality, that's not the case. Stock markets tend to anticipate economic upturns and downturns, so by the time the Fed starts raising rates to cool the economy down, the best gains have gone. The best time to go long on the US market is between the final rate cut of one cycle, and the first rate rise of the next. See 'Easing into profit' for more details on this, and for my suggested instrument for playing this trend.

Watch the White House

Another great indicator for the US market is the presidential election cycle. Put simply, shares tend to rise ahead of a US presidential election, and often fall after one. There are various explanations as to why this should be, but if you go long of the US market at the right time in the cycle, you're almost certain to make money. To find at what that time is, see 'Presidential profits' and 'The presidential trading strategy'

Read your history books

If you're trying to work out how long the current bear market will last, a good place to look for the answer is how long previous ones have lasted. On every occasion since the Great Depression when the UK market has doubled, it has subsequently fallen by at least a quarter. Shares doubled in the 2003-2007 bull market, but they have yet to fall by 25 per cent. You have been warned - now see Histrionics for full details.

Sell in May

'Sell in May and go away, don't come back 'til Leger Day' is a popular stock market adage. And with good reason. Shares often outperform in the first and second quarters, only to languish over the summer. And summer underperformance is even more likely if shares fall during the first two quarters, rather than rising. For more on this, see 'Probability theory'. It'll make you think twice about entering the market before the runners line up at Doncaster.

DOES IT ALL WORK?

More times than not, yes. For instance, I called a top in the UK markets on 12 May - within a week, the market had indeed peaked (the FTSE All share closed at 3,243 on 19 May) and has since dropped 5 per cent.

My short positions from earlier in the year are generally in profit, and will be significantly so if the market falls further, as I expect it will.

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