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I'd like to invite discussion on a topic that I've been chewing on the past few months: market conditions, or as I think of the issue, market "mood."
I'm sure we've all had the experience of trading a system that works really well ... for a while. Then, whether gradually or suddenly, the system just seems to stop working. Every time you look for a continuation of a trend, the trend reverses. Every time you look for a retracement, the trend just steamrolls you over. It begins to seem that the market is deliberately hunting down your stops every time you enter a trade.
What happened to turn your winning system into a dead loser? In a nutshell, the market changed its mood. Sometimes the market favors breakouts; sometimes it favors reversion to the mean. Sometimes range is wide; sometimes it's narrow. Sometimes volatility is high; sometimes volatility is low. Etc. A system that is developed in one kind of market cannot be expected to produce similar results once conditions change.
I have experienced system-wrecking market mood changes multiple times, and I think they represent the single most difficult challenge that traders face. I've been working to develop a set of cues to tell me what kind of market to expect on a given day and how to adapt my trading accordingly. I'll offer some of my thoughts along these lines, but first want to invite input from others on the following questions:
1. Do you make changes to your trading methods in response to changes in market conditions? For instance, trading different setups once you observe changes in the market, or trading the same setups differently (like tightening or widening the stops)? Or do you trade the same setups the same way at all times?
2. What do you look at to determine what kind of market conditions are currently in play? For instance, do you look at the results of recent trades, or an objective measure of volatility like the VIX? Or maybe you look solely at price action?
3. If you believe, like I do, that market conditions come and go in cycles, how long do you think a particular set of conditions will typically last? For instance, if the market has entered a phase that favors breakout trades and long, sustained intraday trends, would you expect those conditions to remain in play for days, weeks, months? Or do you think conditions change more quickly, like day to day?
Thanks all for the input and I look forward to a good discussion.
I think there are a couple different schools of thought when it comes to whether you should adjust your trading in response to broader market conditions.
Some traders believe that consistency in execution is the key, and that it's therefore necessary to trade the same setups the same way at all times. This is the only way you can be certain that the method you're trading is the same method you've studied and tested.
Other traders believe that trading methods need to be dynamic and constantly tweaked in order to capture what the market is willing to give you on a given day.
I'm curious where other traders fall on these questions. I have gone back and forth over the years but currently am very much in favor of changing my trading methods in order to try to capture what the market is doing right now.
1. Do you make changes to your trading methods in response to changes in market conditions? For instance, trading different setups once you observe changes in the market, or trading the same setups differently (like tightening or widening the stops)? Or do you trade the same setups the same way at all times?
Same method different stops vs volatility
2. What do you look at to determine what kind of market conditions are currently in play? For instance, do you look at the results of recent trades, or an objective measure of volatility like the VIX? Or maybe you look solely at price action?
Price Action
3. If you believe, like I do, that market conditions come and go in cycles, how long do you think a particular set of conditions will typically last? For instance, if the market has entered a phase that favors breakout trades and long, sustained intraday trends, would you expect those conditions to remain in play for days, weeks, months? Or do you think conditions change more quickly, like day to day?
I am a day trader a check the conditions of the current day
My answers were quite synthetic but I like simple things like in my trading. My trading is really based day by day, too much information and thinking is confusing me. I look at vwap which is a very honest indicator as it is the same for everybody (min, range, renko, tick etc...) therefore we (small and big) read all the same values on any chart. I use price action and Fibs and look for countertrends or follow the trend over vwap. I don't take more than 2 or 3 trades a day. I trade CL and 6E which, for my point of view, are more reliable.
I been in this dilema for the past three years as well. Now im more inclined in changing my trading method as well seems to work alot better than just executing the same day in and day out. I trade wt the market has to offer for that day in particular if it's breakouts i'll trade the breakouts. If the market is consolidating i'll often trade small quick trades adjust my stops accordingly. To me the market is like the ocean you just have to go with the flow if you go against it you will drown. A surfer one day gets big waves to surf the next day it may be small waves so get out the boogie board...lol.
2) Does not matter. I scalp for a small number of ticks, at that scale, it doesn't matter what the market mood is, trending, ranging, consolidating, etc. Outside of abnormal market events, there is always numerous 6 to12 ticks moves to be scalped in either direction, in my chosen instruments.
Things change. 10 years ago you could "easily" extract 10 points a day out of the ES. It's a bit harder to that nowadays.
I only change my risk/money management, my methods works in "all" market conditions. It doesn't make sense to exit a trend early if you can extract a few more points on a regular basis. On the flip-side, it can be hazardous trying to catch trends in a flat/choppy market. You have to adapt...
From the responses so far, it sounds like there are a variety of approaches. Keep them coming.
Here's a specific example of a change in market mood from my own trading. At various times I've had success with a countertrend reversion-to-mean (RTM) strategy on TF or YM. The strategy is traded on a tick chart and uses two main indicators, a simple moving average (SMA) and an envelope set some number of ticks above and below the SMA.
When conditions are right (more on that later), you can observe that price generally stays within the envelopes. This means that when price is trading above the upper envelope, it has become overextended and is due to reverse and retrace at least back down to the SMA. So the system therefore looks to short when price is above the upper envelope, and looks to go long when price is below the lower envelope. There are various ways to time the precise entry and exit but that's the basic principle.
Now consider the impact of market conditions. I’ve found that this system works great sometimes, and at other times is virtually the exact opposite of how you should be trading. In other words, depending on market conditions, you should either buy when this system says to buy, or you should sell when this system says to buy. Same chart, same indicators, different market moods -- and it’s the latter that makes all the difference.
So what specifically is going on to make the system work well in one market mood and fail miserably in another? In this case, it boils down to volatility. High volatility = more intraday reversals = higher probability that fading any given move will result in an opportunity to profit. Low volatility = fewer intraday reversals = higher probability that fading any given move will be a very bad idea.
I’ve attached a couple of pics to illustrate what I’m talking about. The first pic shows a typical trading day in a high volatility environment, like what we experienced for months in the summer of 2010. The second shows a low volatility environment, like what we’ve seen for most of 2011. Just a completely different animal.
Can you be more specific as to what you mean by the word "volatile" here? Do you mean a market with a tendency to reverse quickly (which is what I think of as volatile), or something else? A fast-paced market, maybe, with a trend running quickly in one direction?
