The ways your trading model could leading you astray

I have had a number of discussions with subscribers asking for more "how to" posts (see Teaching my readers how to fish). This will be one of a series of occasional posts on how to build a robust investment process.

For traders and investors, one of the challenges is how to build a robust discipline that works well through different market regimes. As a case study, consider this study from Simple Stock Model that generates signals based on the cash flows in and out of the SPY ETF as a sentiment signal. The trading rule is: "If the 4-week average of the 3-month change in SPY's percentage of shares outstanding is greater than +5%, be out of the market."

The chart below shows the equity curve from this trading system (white line = buy and hold, blue line = trading system). The results look pretty good, especially for a relatively low turnover model. (Incidentally, it's on a sell signal right now).

SPY shares outstanding trading system

Not so fast! Don't jump to conclusions before digging into the data and reading the fine print.

The full post can be found at our new site here.