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Elaine Wah

Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

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May 31, 2003

Swing Trading: Power Strategies to Cut Risk and Boost Profits

By Gregory Bresiger

Also in this article

  • Swing Trading: Power Strategies to Cut Risk and Boost Profits

by Jon D. Markman

(John Wiley & Sons, New York, 320 pages) $29.95

reviewed by Gregory Bresiger

Hold your positions through thick and thin. And one will make money over the long term. This will happen, in part, because your steady as she goes style will keep your costs low.

Such has been the conventional wisdom of modern portfolio theory. It was a religion many professional traders adhered to up until about three years ago.

That's when a protracted bear market led many professionals to question the wisdom of the temple, especially some of its high priests who said that the Dalai Lama of our economy, Alan Greenspan, had abolished the business cycle. The buy and hold strategy was a can't lose position, said many investment heavyweights. Most of these fellows are probably related to the guys who said the Oakland Raiders were "a can't miss" to win the Superbowl.

But men and women of doubt have appeared over the past few years. They have asked some discomforting questions. What if we are in the middle of a long-term bear market? What if this market bears striking similarities to 1933 instead of 1983? What if the buy and hold idea is the reincarnation of the Irving Fisher analysis of the early 1930s. Fisher was the economist who said that stocks had achieved a permanent plateau, a plateau from which they would never slip.

In the case a 1930s market, one is playing a losing game because there are years of red ink ahead. Many investors and traders, the author of this book would argue, will drop out and take their losses long before the market recovers. So what is an investor or a trader to do?

The author holds that the professional should consider another style, which is neither the guerilla warfare of day trading nor the Buddha/Joe Torre like stoicism of the investor who holds on forever. (The Yankees can be ahead or behind by 20 runs and he always looks the same. Gee, what is the guy drinking on the Yankee bench?)

Sure, if this 1933 investor had 20 or 30 years, he would do fine. But not everyone has either the time or the stomach to glide through disasters, the author warns. This is true. So many investors perform worst than their investments. How is this possible? Because investors - and I suspect more than a few traders - have a tendency to jump ship at the first sign of trouble and, of course, pour too much money into their investments as the market is headed up, but about to peak.

This book explains a third way of trading. It's not day trading. It's not trading for a portfolio that one will hold forever or until pols keep campaign promises. In between these two extremes is swing trading. Swing traders aren't holding their positions like Warren Buffett. And they're not trying to exploit momentary opportunities, writes Jon Markman, who is senior investment manager and portfolio manager at Pinnacle Investment Advisors.

Those following the latter discipline aren't buying and selling stocks over the space of a few minutes or a few decades. Swing traders buy and sell equities over weeks and months, the author explains.