Stocks & Commodities V17:12 (529-532): Markets Don’t Trend, They Burst by K.D.
Angle
TRADING TECHNIQUES
Markets
Don’t Trend,
They Burst
Is there really such a thing as a trend? Maybe not. Maybe a
relatively few pops in price make up most of the market
movement we see.
by K.D. Angle
oes this statement, or something
like it, sound familiar? “Of the
annual returns from the stock
D market over the last 10 years,
90% were generated in a month
or so, and unless you’re always
in the market, you’ll miss out
on those few days that generate
the vast majority of returns.”
Variations of that statement
are common, and it’s true that
an “always in the market” strategy has worked for portfolio
managers like Warren Buffett as well as large commodity/
futures money managers that utilize long-term trend-follow-
ing strategies. Stepping back and taking a look at a 10-year
chart of the daily prices of the Dow Jones Industrial Average
(DJIA) would certainly give an observer the impression that
this has been a long-term trending bull market. Even if you
examined a monthly chart over the last few decades, you
would come up with a similar conclusion. But if you were to
analyze the movement of daily net vertical price movement,
you would begin to understand that there was something
altogether different taking place.
As a market timer, I wanted to know if market prices really
tended to move in bursts, something that generally favors the
“in the market all the time” approach. I wanted to answer the
following questions:
1 Out of roughly 250 trading days in a calendar year, how
many trading days contributed to generating all of the
net vertical price movement during the course of a
calendar year?
2 If the net vertical price movement were generated from
a particularly small number of trading days, is this
phenomenon unique to the stock market, or does it
occur in other markets as well?
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THE BURST EFFECT
First, I looked at a 10-year history of the current bull stock
market and determined how many trading days generated
most of the vertical price movement each year. My research
confirmed that 80% of the gains made in the stock market
have been generated in about three trading days on average
per calendar year. Unlike many other markets, however, the
stock market has been pretty much a straightforward affair
for many years.
Most other markets such as Treasury bonds, crude oil, and
foreign currencies have not experienced a decade-long bull
market the way the stock market has. In most other markets,
sometimes the trend is up, and sometimes the trend is down.
So rather than using a 10-year period in evaluating those
markets that do not concern stocks, I looked at each market
and defined the direction of the trend in terms of calendar-
year periods.
Defining trends in terms of a calendar year gave me the
ability to compare differing markets and compare them with
a major stock index such as the Standard & Poor’s 500. Doing
this helped me determine if this burst phenomenon was
unique to the stock market or one that also occurred in other
markets, whether prices moved up or down. I used as ex-
amples four very different markets representing stocks (the
Standard & Poor’s 500), debt (T-bonds), currencies (yen),
and commodities (coffee).
I examined calendar years starting in 1983 and ending in
1998. In each calendar year, I determined that a market had
an up year or a down year if the year-end closing price was up
or down relative to the closing price at the beginning of that
year. If the year was up, I determined how many net up days
actually contributed to the highest closing price for that year.
I define a net up day as one that produced a high that was
higher than the previous highest high made up to that point
during that calendar year.
New Net up
high days
New
high
NET UP DAYS
In a down year, I determined how many net down days
contributed to making the lowest closing price for that year.
A net down day is a day that produced a low that was lower
than the previous lowest low made up to that point during that
Stocks & Commodities V17:12 (529-532): Markets Don’t Trend, They Burst by K.D. Angle

calendar year. With these num-

bers in hand, I then compared
those net up or down days as a
percentage of the 250-odd total
trading days for that year. Take a
look at the Standard & Poor’s
500 index market:
CALENDAR MARKET TOTAL NET PERCENT OF
YEAR DIRECTION DAYS TOTAL DAYS
1983 Up 42 16.8%
1984 Down 23 9.2
1985 Up 26 10.4
1986 Up 30 12.0
1987 Up 42 16.8
1988 Up 20 8.0
1989 Up 48 19.2
1990 Down 24 9.5
1991 Up 26 10.4
1992 Up 15 6.0
1993 Up 21 8.4
1994 Down 7 2.8
1995 Up 80 32.0
1996 Up 29 11.6
1997 Up 41 16.4
1998 Up 41 16.4

As you can see, the fewest

trading days that generated all
of the vertical price movement
for the year occurred in 1994,
with only seven days, or 2.8%,
of the total year’s trading days.
The greatest number of trading
days that contributed to verti-
cal price movement occurred
in 1995, when 80 days, or 32%,
of the year’s total trading days
generated all of the vertical
price movement.
On average, 32 trading days,
or 12.88%, of the total trading
days in an average year for the
S&P 500 generates 100% of
the vertical net change for the
year, regardless if the market is
moving up or down. This study
indicates that a trader trying to
take advantage of all of the
vertical price movement in a
typical calendar year will be
bored a great deal of the time,
since the market is going no-
where 87.12% of the time.
Next, I checked three other
major markets to determine if
what I had found in the S&P
LISA HANEY

was the rule or the exception.

OTHER MARKETS
Using the same criteria I used to

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 Stocks & Commodities V17:12 (529-532): Markets Don’t Trend, They Burst by K.D. Angle

study the S&P 500, I generated Figures 1, 2, and 3, a 20%

comparison of coffee, Treasury bonds, and the yen. I noted Coffee
18%
the relative consistency of the average percentage of net days, Net Days

PERCENT OF ALL TRADING DAYS

going up or down: 12% +/-1%. 16%

14%
Markets don’t trend; they burst. 12%
They generate the vast majority of
10%
their movement in only 12% of Average = 11.3%
their trading days. 8%

6%

In addition to the markets discussed previously, I looked at 4%

most of the major futures markets available. Of those I
examined, all exhibited similar burstlike characteristics; nearly
all of their vertical price movement was generated in only
about 12% of the trading days during the course of a calendar
year. I concluded this is one reason why the long-term trend-
following strategies of the very large trading managers suc-
ceed, while those trying to time the market (generally small
individual traders) are not usually rewarded for their efforts.
But if this burst effect is inherent within all markets, how
can the small trader with smaller levels of capital be success-
ful if significant vertical price movement occurs so seldom?
USING THE BURST EFFECT
As appealing as the low-maintenance qualities of long-term
trend-following strategies are, small individual traders should
accept the fact that they require large exit stops. This means
greater risk per trade and the necessity of a large pool of
trading capital if the trader is going to have a small risk
relative to capital. If, on average, 12% of the trading days
generates all of the net vertical price movement during a
calendar year, you have about a one-in-eight chance of
predicting when this net price movement might occur. These
are not good odds.
2%
0%
1977 1982 1987 1992 1997
YEAR
FIGURE 1: COFFEE, DAYS OF MOVEMENT. When you count the days that actually led to
new highs and new lows, you’ll find that, in most markets, only about 12% of trading days
contribute to net price movement, up or down. For coffee, it was 11.3%.
In designing an appropriate trading strategy for small
individual clients who want to use their own accounts, I
wanted to avoid entering the market during high levels of
price volatility and instead enter when low volatility worked
to my advantage. Most long-term trend-following strategies
that are in the market all of the time tend to reverse themselves
when a large degree of volatility comes into the market. A
trade exit point must be outside the point at which price
volatility occurred to make any sense. An exit stop inside this
range of high volatility will tend to bounce the trader out
prematurely and actually add more risk to the program in an
attempt to reduce losses.
We actively look for periods when price activity is rela-

25% 30%

Treasury Bonds Yen

Net Days Net Days
25%
PERCENT OF ALL TRADING DAYS

20%
PERCENT OF TRADING DAYS

20%
15%

15%

10%
Average = 13.7%
10%
Average = 12%

5%
5%

0% 0%
1977 1982 1987 1992 1997 1977 1982 1987 1992 1997
YEAR YEAR

FIGURE 2: TREASURY BONDS, DAYS OF MOVEMENT. Similarly, for Treasury bonds, it was FIGURE 3: YEN, DAYS OF MOVEMENT. And for yen, it was 13.7%.
12% even.

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Stocks & Commodities V17:12 (529-532): Markets Don’t Trend, They Burst by K.D. Angle

tively quiet. An easy way to determine if price volatility is
currently low is by comparing last week’s price range to last
month’s price range. Generally, when the weekly price range
exceeds the monthly price range, there are significant levels
of price volatility and it’s a good time to avoid the market, at
least when using a relatively small trading account. We look
to enter when price volatility is low or nonexistent.
During a quiet period in the market, I can concentrate on
the direction to position myself. I define the major trend by
using a simple long-term moving average of at least three to
four months. If prices are trading above this moving average,
following trading programs, long-term trading certainly did
not benefit those in the stock market between 1929 and 1955.
It took 26 years for stocks to finally make a new market high.
However, if you don’t have the necessary trading capital to
employ a long-term trend-following strategy, paying atten-
tion to when volatility is absent in the market should go a long
way in improving your chances for success.
Kelly Angle, CTA, is president of K.D. Angle & Co.
†See Traders’ Glossary for definition S&C

the greatest burst days are generally going to be in the up

direction, while the greatest down burst days are most often
going to be small and much shorter in duration because they
run counter to the major trend. By looking to enter new
positions during periods of low volatility, I have the oppor-
tunity to use relatively small exit stops, which is the edge that
a small trading account must have in order to generate a better
probability of producing positive results over time.

SUMMARY
Markets don’t trend; they burst. They generate the vast
majority of their movement in only 12% of their trading days.
While the tendency for prices to burst or move quickly in a
short period may favor the in-the-market, long-term trend-

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