Statistical Analysis
Larry Connors On How Markets Really Work
by Jayanthi Gopalakrishnan
Laurence Connors is chairman and chief executive officer of TradingMarkets.com, a financial markets information company he founded in 1998. With more than 22 years' experience in the financial markets industry, he is also the managing director of Connors Capital, a private investment company. Larry Connors has also authored top-selling books on market strategies and volatility trading, including Street Smarts (with Linda Raschke), How Markets Really Work, Connors On Advanced Trading Strategies, and Trading Connors VIX Reversals.His opinions and insights have been featured or quoted in The Wall Street Journal, The New York Times, Barron's, Bloomberg TV, Bloomberg Radio, Dow Jones Newswire, Yahoo! FinanceVision, Los Angeles Times, E-Trade Financial Daily, Futures magazine, Technical Analysis of STOCKS & COMMODITIES, and others. He has been a featured speaker at a number of major investment conferences over the past decade.
STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan interviewed Larry Connors on October 7, 2004.
I encourage people to try to systematize their trading as much as possible. Taking the emotion out of trading is very important.
Larry, how did you get interested in technical analysis?
Back in 1987, there were very few books written on trading or technical analysis. My goal was to be able to trade for myself on a full-time basis, and support my family. It took seven years before I was comfortable enough to do this for myself. The path to the same goal is probably a lot smoother today, because of the amount of information that's out there. But back in the late 1980s and early 1990s it didn't exist.
In 1994, I left Donaldson Lufkin Jenrette and started my hedge fund. Also at the time, I co-authored a book, which McGraw-Hill published, and also began publishing my own research.
And that's what you've been doing for a while now, right?
We've been publishing now for approximately 10 years. In our latest book, How Markets Really Work, there's been an evolution of my own thinking. We're at the stage right now where, if it can't be quantified, we're not going to trade it. We need to have statistical analysis behind it.
Your latest book is quite interesting. You actually took some of the conventional notions of trading and indicated that they may need rethinking.
Yes. We didn't create those conclusions; the statistics came to those conclusions. The statistics have shown through a raging bull market from 1989 all the way to 2003 that buying into strength has proven to be, at best, a break-even proposition and, in most cases, a losing proposition. Really, the edge is buying into weakness and then shorting at the strength of down markets.
Why do you think that buying into strength is not a good strategy? Is most of your trading on a short-term basis?
Yes, it is. Most of the positions we hold are anywhere between one to five days. So that becomes a primary consideration.
Our research is done to support our trading. In the book, we looked at everything over a one-day basis, two-day basis, and five-day basis. For example, the first thing we looked at is what happens to the market -- the Standard & Poor's 500 and the Nasdaq 100 -- after it has made a new 10-day high, versus after it has made a new 10-day low. And what we found is something that people can end up applying.
Over the past 15 years, every time the S&P has made a new 10-day high, if you had purchased the market that day and held it for a week, despite the fact that the market nearly tripled in value during that time, you would have netted no gains. In fact, you would have ended up with a slight loss during that period.
...Continued in the December 2004 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the December 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.
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