V.6:7 (240-243): Mutual fund trading strategy by Stan Jones

V.6:7 (240-243): Mutual fund trading strategy by Stan Jones
Item# \V06\C07\MUTUALF.PDF
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Mutual fund trading strategy by Stan Jones

It has always struck me that the typical technical analysis software package doesn't answer the right question. It plots technical indicators on the same screen with prices so the user can pick the one or the combination that seems to call turns in the market. Then, presumably, the user goes away and begins to trade on that indicator.

The problem is that the real trading question is not, "How does the indicator Q look on a computer screen?" The question is, "How much money will I make or lose if I use indicator Q in the real world?"

This question cannot be answered by anyone but a seer, since it depends on what prices will do in the future. However, a closely related question, "How would I have profited if I had traded on indicator Q in the past?" can easily be answered, particularly by a computer. With a file of historical price and dividend quotes, the computer can give us an accurate idea of how a given trading strategy would have worked in the past.

As a former engineer (since lapsed into news papering), I still favor the KISS (Keep it Simple, Stupid),approach to life, so I decided to start with the simplest strategy imaginableó the Moron Strategy.

It goes like this: suppose a moron put up $10,000 to trade in Fidelity's Magellan mutual fund in 1979 (that's as far back as my Magellan quote file goes). Suppose further that this moron bought Magellan if it made a low and then rose some percent (adjusting appropriately for any price changes caused by dividends and capital gains distributions). That is, if L was the low, the moron would buy Magellan when the quoted price, Q, reached X percent above L, the lowest price since the last sale. In other words:

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