How to buy stock - A story of a discovery

When I started to invest, I probably did what most people do:

I read. I listened. They were speaking in riddles. About support and resistance, profit taking, worries about interest rates. Everyone seemed to have an explanation for everything. I looked at the tips on forums and followed respected writers views.

And I lost money hand over fist.

Sure there seemed to be explanations. But none of them seemed to be work.
So thats when I started to get wise. I stopped investing

And I started to test.

Surely there was someone out there, who knew how to buy stocks. I figured.
It was a matter of sorting through ideas to find the wheat from the chaff.

Now I had tested O higgins system - the dogs of the dow, I referred in the previous post.
And sure If you were patient it seemed to me you could be reasonably confident of beating the index as a long term investor.

But I was impatient! I wanted a system that worked quicker.

So I went through all of the standard and respected texts. And got more and more depressed.
I got to be good at backtesting stock ideas - and proving none of them work. Not over the long term, and not in the simple forms presented.

If you have any doubts on this, go test one of those moving average crossing systems that appear in the chartist books. See how much money you LOSE!!! -

It just is not that simple, and I am convinced that much of that stuff is repeated from book to book, by people that never tried it. All the spreadbetting companies are happy to show you that technical analysis, it helps you to leave more money with them.

So then I decided to get clever. I had spent my earlycareer using complex maths to look for tiny signals hidden in massive noise in hush hush military systems. So I started to apply a few simple ideas for looking for patterns..and then!!!!!

And then I tripped over a secret........The answer was far simpler than I ever thought it could be.
In fact when I discovered it, I spent at least a week, looking for the error I had made. I just didnt believe it could be that simple.

Thats the simple trading idea that produced the graph above for the FTSE.
I would like you to look at just two things.

First,

It really does massively out perform the FTSE

Second, there is not the massive leverage in most of these dishonest trading schemes - in fact the risk on any trade is only ever 5% of capital before we pull the trade.

The final observation - where are the bad years?
Most of the losses occured at times when we were out of the market and a stop loss straegy caught many of the others

And this isnt some overtuned indicator scheme, that only works on paper.
In fact - the scheme contains no maths at all - so it cannot be overcooked.

And before you do the sums - that is showing 200% per year.
I am NOT promising you will do that. What I am saying is when you understand the reason, and look through the history you will be confident that there must be something in this.

In the next post - how I searched for the needle in the haystack and where that graph came from!