This is an old cliche every market player knows, but Jack Ablin, chief investment officer of U.S.-based Harris Private Bank, argues against befriending all trends blindly.
In his new book, he says: “One must recognise the point at which that trend is old and about to shift gears, alter direction, or simply vanish altogether… It’s the new, new thing that grabs their attention.”
Harris Private Bank’s analysis shows that relying on the signals sent by the 200-day moving average — a technical strategists’ favourite arsenal in gauging momentum — would have fared better than just following the advice to “buy and hold”.
The $100 invested the Dow Jones Industrial Average in December 1980 would have increase to $1,681 if you followed the momentum trading strategy of buying when the Dow moved one percentage point above its 200-day average and sold when it dropped one percentage point below its 200-day average. The buy and hold investor would have ended with $890.
“Momentum metrics, used correctly, can help you pull your chips off the table at the right time more reliably than any other signals,” he writes.