Why it’s good to be long

A few years back, when we were first getting excited about the benefits of spread betting, the often-repeated line was …

“Now you can make money whether the market goes up or down!”

‘Whoopie do’ we all shrieked, and proceeded to turn our trade signals on their heads and trade down trends with the same enthusiasm we’d traded up trends.

It no longer mattered which way the market moved – as long as it moved.

But there was an important piece of the trading jigsaw that got thrown out …

That up trends and down trends are very different beasts in the equity markets.

Bulls vs Bears

Let’s consider the two emotions that drive these markets.

An uptrend is driven by greed. We see money pouring into a market and think we’d like a slice of that.

By contrast, a downtrend is driven by fear. We see money abandoning the market, and want to jump ship before it sinks.

The first tends to be a steady accumulation of money moving in. The second tends to move in waves of panic-stricken selling.

Here’s an example, showing the bull market running steadily from 2003 through to 2007 …

And the sharp, messy decline that followed over the next 18 months.

Looking at this chart, we have to question the wisdom of trading up and down trends in the same way.

Bull markets last on average 97 months, while bear markets last around 18 months. You might think, ‘I’ll have to wait 5 times longer to make the same profit!’, but the reality is that volatile bear markets tend to cover only 40% of the territory that the bull market gained, and are much more dangerous to our wealth.

And please don’t think this only affects long-term investors. Taking a picture of the bullish or bearish-ness of our market at the start of the day should be standard practice for day traders.

What’s behind a bull market?

A gaining stock market index, like the Dow, the S&P500, the FTSE … are the signs of a bull market.

Traditionally a bull market will go hand-in-hand with rising oil and metals markets, as growing economies demand commodities. Conversely, a bull market would expect to see a depreciating dollar index, as the currency loses value.

So, our perfect scenario for a bull-market day would be a rising index, rising oil and metals prices, and a falling dollar index.

These are the signs that we can look forward to a good day’s trading.

Of course, in the markets, there are plenty of things that can come along and upset our perfect day …!

What this means for you …

We can take the following facts from this …

• that up trends are more reliable and predictable than downtrends.

• that up trends will last longer than down trends

• that up trends will move further than down trends

• that correlation of an up-trending equity market with oil and metals, with a falling dollar index tell us that our bull is in prime health

So, how do we take advantage of long trading? The technique I was hoping to tell you all about this week is a long-only system. It only every gets into strong markets that are moving up. Apologies again that I haven’t been able to reveal the details on it this week – but please do watch for my email next week.

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