Minyan Mailbag: Context
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I think that it's important to take the comment you reported about in context (or what was probably its intended context).
I am not sure which article you read that made such a comment, but perhaps the author of that comment meant something a little different.
Let me give you an anecdote as an example:
Years ago, I got a TradeStation, and I tested my own "trading systems." One thing that I quickly realized is that you have to "tell" the TradeStation EVERYTHING. Humans take for granted just how many criteria/variables are involved when making decisions. I won't go into too much detail about this because I know that you understand what I am trying to say (I subscribe to your site, so I know that you are aware of how specific your criteria must be when testing a given signal).
Anyway, perhaps the author of the statement meant to say something with the following criteria (I am purposefully being "loose" with my criteria):
1. Large move higher over the previous months.
2. Followed by a sell-off lasting for more than a few days.
3. Followed by a rally that "fails" ("fails" could be hard to define).
One other anecdote I can think of is the "How To" speeches we all had to give in grade school. I can remember a student giving a speech on how to make toast and forgetting to tell the other students to take the bread out of the toaster before buttering it (it's easy to assume that the listeners know the context of what you're trying to say).
That being said, I do expect more downside (a lot more).
I agree that context is vitally important, and the rules you use for whatever test you're doing can drastically affect the outcome.
I didn't use any filters for the test I cited, because the manager I alluded to didn't either. It was a blanket statement that "whenever" we see such reversals, it leads to more downside. Given that generality, that's what I tested.
By the way, I also expect more downside, but relying on it because of yesterday's reversal is not one of the reasons...
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