Trading and investing is not a science. There is no “secret indicator” that is better than all the other indicators. There is no “secret sauce” or holy grail strategy that is better than all the other trading and investment strategies.
Hedge fund manager Ray Dalio said that the best trading strategies are “timeless and universal”. Some traders take this the wrong way and assume that the best strategies can work in all markets. This simply isn’t true. They are misunderstanding Ray Dalio.
- When Dalio says that a good strategy is “timeless”, he’s stating that the same FACTORS will always determine that market’s direction. You just need to know what those factors are and incorporate them into your strategy.
- When Dalio says that a good strategy is “universal”, he’s stating that the concepts behind that strategy should work for all RELATED markets, not ALL markets.
Here’s what I mean.
Timeless and universal trading strategies
There’s no trading/investment strategy that works forever and in every single market. This is something that most traders fail to realize. For example, some traders will use an Elliot Wave strategy in commodities, currencies, and stocks. Elliot Wave works well in some markets like forex and works poorly in other markets like stocks (the stock market doesn’t have 5 waves. It can have 10, 15, or 20 waves).
However, a “timeless strategy” means that the CONCEPTS behind that strategy will always be valid. For example, the stock market and economy move in sync over the long term. This concept will always be true because the economy drives corporate earnings which drives the desirability to own a yield bearing asset like stocks. It doesn’t matter what century you’re in. The stock market and economy will forever be aligned in the medium-long term.
Hence, understanding the economy to make medium-long term trades is a timeless strategy.
A “universal strategy” means that the concept behind that strategy is applicable to all related markets. For example, the fundamentals and economy drive the stock market in the medium-long term. This is true across all stock markets.
- China’s fundamentals and economy will drive the Chinese stock market.
- The U.S.’ fundamentals and economy will drive the U.S. stock market.
- Germany’s fundamentals and economy will drive the German stock market.
- Canada’s fundamentals and economy will drive the Canadian stock market.
There is no SPECIFIC one-size-fits-all strategy that’s timeless and universal
- Notice how I said that it’s the CONCEPTS behind a trading strategy that are timeless and universal.
- I never said that the SPECIFICS behind a strategy are timeless and universal.
This means a few things:
You can’t use the same indicator readings.
Let’s assume that you have a contrarian strategy.
You cannot use the same RSI (momentum indicator) readings to catch tops and bottoms in 2 different markets. For example, silver might bottom when RSI hits 10. The S&P 500 might bottom when RSI hits 25.
You cannot have a rule in your model that says “buy when RSI hits 25” because you will be too early on your BUY signal for silver.
So although the same concept – buy when the market is “oversold” – applies to 2 different markets, the precise definition of that concept (how low of an RSI counts as “oversold”) is different depending on the market’s own characteristics.
You can’t even use the same indicators
The same indicator does not work well in all markets. For example, Bollinger Bands is useful for trading the stock market’s short-medium term. This is because the stock market rarely crashes in a nonstop vertical line.
However, Bollinger Bands doesn’t work well in silver. Silver tends to swing sideways for a long time, crash/soar, swing sideways for a long time, crash/soar, swing sideways for a long time….
This means that Bollinger Bands can’t be used to pick bottoms and tops in silver.
Another example are moving averages. Moving average support/resistances work well in the forex markets. Common moving averages like the 50 sma actually do act as support and resistances for currency pairs.
Moving averages don’t work well in the stock market. The stock market disregards moving average support/resistances most of the time.
Which indicators work best in a market depends on that market’s traders and investors.
- Forex is dominated by short term traders who use the same moving average support/resistances. Their watching these moving averages becomes a self-fulfilling prophecy. It works because everyone is using it.
- The stock market is dominated by large institutional investors and mom-and-pop investors who focus on the fundamentals. Hence they disregard moving averages, which makes it work less effectively.
A trading or investment model is not static
I mentioned this in my How to build a model guide. No model will work forever. The concepts behind a model will always work, but the SPECIFIC way of defining those concepts will change.
For example, the stock market and “economy” move in sync over the medium-long term. This is a CONCEPT that will forever be true. If you understand the “economy”, you can predict the stock market.
However, the best way to understand the economy has changed over time.
- For example, understanding agriculture output before the 1900s was important because we had an agricultural economy. This is not true today because developed nations are no longer agriculture-based economies.
- Understanding Industrial Production was important from 1900 to the 1960s because the U.S. had an industrial-based economy. This is no longer extremely important today because the U.S. is not a manufacturing based economy.
- Understanding Consumer and Business loans is important today because economic growth is heavily financed by borrowing for future spending and investments.
So remember that while the CONCEPTS behind your model should always be valid, the specific way of defining those concepts will change over time.