How To Evaluate a Good Stock Market Timing System
945
Finance > Stock Market
Mar 1, 2007
John M. McClure
How To Evaluate a Good Stock Market Timing System
Copyright 2006 Equitrend, Inc.
No matter what investment discipline you use, there are three important variables for measuring your success - peak-to-valley drawdown, beta, reward/risk ratio. The first and most important factor is your measure of risk. Performance volatility is a measure of the variability of an investment's rate of return.
Specifically, it is the standard deviation of the sample set of monthly returns that have been observed for the investment over the interval being considered. A simple way to measure a good stock market timing system is to calculate the largest peak-to-valley drawdown that has or would have occurred in the last five years. This drawdown is your measure of risk.
Second, is your beta to the overall market. Beta is an important variable that measures portfolio or timing system volatility as compared to an index. Most Betas are calculated based on the S&P 500 index. A beta of one tells you that the system has the same volatility (i.e. risk) as the S&P 500 index. A beta of two tells you that the system has twice the volatility as the S&P 500 index.
By actively managing your money, your stock market timing system should allow you to reduce the beta of your portfolio as compared to the index you are trading and substantially improve your returns over time.
Third, is your reward/risk ratio, which calculates your reward as compared to your risk. In order to calculate this, you need to know your average rate of return. A rule of thumb is that your return should be at least twice as large as your risk. For example, if your largest peak-to-valley drawdown percentage over the last five years is 15%, your average rate of return should be at least 30%. In other words, your reward/risk ratio (30%/15% = 2) should be 2 or greater.
The best stock market timing system for you will depend a lot on your personality, specifically your tolerance for risk. You might think a trend timing system that averages 80% is a great system, but what if I told you that system had a risk potential of 35%?
Most people cannot tolerate a system that decreases their investment capital more than 20%. Your tolerance and ability to accept risk should help you identify a stock market timing system that?s right for you.
There are only a few systems available that really work. Most come and go like mayflies on a warm summer?s day. When evaluating a timing system, it?s important to consider all of the above factors plus whether or not the system has survived and prospered over at least a five year period. If they?ve made it through the last five to six years, you?ve likely found a good stock market timing system. John M. McClure is CEO and President of EquiTrend Inc., a stock market timing system that averages 42% profits per year. Mr. McClure is also a Registered Investment Advisor and President of the National Association of Active Investment Managers. www.equitrend.com
No matter what investment discipline you use, there are three important variables for measuring your success - peak-to-valley drawdown, beta, reward/risk ratio. The first and most important factor is your measure of risk. Performance volatility is a measure of the variability of an investment's rate of return.
Specifically, it is the standard deviation of the sample set of monthly returns that have been observed for the investment over the interval being considered. A simple way to measure a good stock market timing system is to calculate the largest peak-to-valley drawdown that has or would have occurred in the last five years. This drawdown is your measure of risk.
Second, is your beta to the overall market. Beta is an important variable that measures portfolio or timing system volatility as compared to an index. Most Betas are calculated based on the S&P 500 index. A beta of one tells you that the system has the same volatility (i.e. risk) as the S&P 500 index. A beta of two tells you that the system has twice the volatility as the S&P 500 index.
By actively managing your money, your stock market timing system should allow you to reduce the beta of your portfolio as compared to the index you are trading and substantially improve your returns over time.
Third, is your reward/risk ratio, which calculates your reward as compared to your risk. In order to calculate this, you need to know your average rate of return. A rule of thumb is that your return should be at least twice as large as your risk. For example, if your largest peak-to-valley drawdown percentage over the last five years is 15%, your average rate of return should be at least 30%. In other words, your reward/risk ratio (30%/15% = 2) should be 2 or greater.
The best stock market timing system for you will depend a lot on your personality, specifically your tolerance for risk. You might think a trend timing system that averages 80% is a great system, but what if I told you that system had a risk potential of 35%?
Most people cannot tolerate a system that decreases their investment capital more than 20%. Your tolerance and ability to accept risk should help you identify a stock market timing system that?s right for you.
There are only a few systems available that really work. Most come and go like mayflies on a warm summer?s day. When evaluating a timing system, it?s important to consider all of the above factors plus whether or not the system has survived and prospered over at least a five year period. If they?ve made it through the last five to six years, you?ve likely found a good stock market timing system. John M. McClure is CEO and President of EquiTrend Inc., a stock market timing system that averages 42% profits per year. Mr. McClure is also a Registered Investment Advisor and President of the National Association of Active Investment Managers. www.equitrend.com
Write a Review
Add to My Favorite
Refer it to Friend
Report Article
Other links owned by this user
Copyright 2006 Equitrend, Inc. Many investors still don't know about Exchange Tred Funds (or ETFs) and their vantages over tritional mutual funds. In this article, we'll examine Exchange Tred Funds, their history, performance and
Category:
Copyright 2006 Equitrend, Inc. Much has been written about the virtues and dangers of active stock market trading, or ?market timing.? Most of the pundits and so called "experts" will tell you that stock market timing doesn't
Category:
Copyright 2006 Equitrend, Inc. America is heading for a train wreck. Everyone knows it's coming, but no one is doing anything about it. As an individual, you can wait and hope the inevitable doesn't happen, or you can prepare
Category:
Copyright 2006 Equitrend, Inc. Approximately 75% of fund managers do not beat the S&P 500 year in and year out. How can a basket of 500 hundred stocks beat the majority of actively managed mutual funds? The people who manage these funds are,
Category:
Copyright 2006 Equitrend, Inc. No matter what investment discipline you use, there are three important variables for ing your success - peak-to-valley drawdown, beta, reward/risk ratio. The first and most important factor is your
Category:
Copyright 2006 Equitrend, Inc. It?s important that you understand the impact that a bear market has on your capital. The give and take of your investment capital is not equal. If you placed $100 into an investment and it declined 50% to $50,
Category:
Other links at Finance > Stock Market
How much financial bloodshed is necessary before we realize that there is no safe and easy shortcut to investment success? When do we learn that most of our mistakes involve greed, fear, or unrealistic expectations about what we own? Eventually,
Category:
Over the last eight weeks [June, 2006] I've een spending a lot of time reading articles descriing the current market conditions...trying to figure if it really affects penny stock investors. Are we in a ull market...are we wading into a
Category:
It's been a wild and wooly couple of weeks on the international stock markets. But is the recent slide grinding to a halt...or just taking a breather before tumbling some more? And more importantly, what does it mean to astute penny stock
Category:
Copyright 2006 Equitrend, Inc. It?s important that you understand the impact that a bear market has on your capital. The give and take of your investment capital is not equal. If you placed $100 into an investment and it declined 50% to $50,
Category:
Copyright 2006 Equitrend, Inc. No matter what investment discipline you use, there are three important variables for ing your success - peak-to-valley drawdown, beta, reward/risk ratio. The first and most important factor is your
Category:
Site Sponsor
Directory Statistics
Articles: 68222
Categories: 501
Yahoo Entertainment
