TRADING SYSTEMS
Market Adaptation
Data-Driven Trading
There are three keys to long-term trading success: knowing what to trade, knowing when to trade, and the ability to vary trading style with market conditions. Here’s how you can select the most appropriate tools for trading the markets.
While speaking at a recent trading conference, I asked the audience two questions. The first was, “How many of you think the market will be up or down by the end of the year?” About half the attendees thought the market would be up by the end of the year, and about a quarter thought the market would be down. The second question was, “How many of you do not care whether the market is up or down by the end of the year?” In the entire room only about three people raised their hands. I knew these were likely to be the successful traders in the room.
Adapting to the market
Successful traders have a toolbox of well-tested techniques for use in bullish, bearish, and trading range markets. Based on previous testing and analysis of each of their tools, they know which ones to be using in the current market environment. Whether the market is going up or down does not matter to them; they have learned to adapt to the market because they understand the market will not adapt to them. This is why successful traders have different tools for different market conditions and switch among them based on what the market is doing. If the market direction is important, it is usually a signal that the trader is using the “hold & hope” approach rather than adapting to the market.
Hope is not a trading strategy. Failing to adapt to the market as it alternates between bullish and bearish modes will give traders practice at exercising stops.
Figure 1: declining volume pullback. FCX pulled back for three days on lighter volume each day (down arrows). After making lower highs for three days, FCX satisfied the trigger condition by making a higher high on April 15 (marked by the up arrow). Following the pullback and trigger condition, FCX moved up 9% in just five days.