Profitable ETF Trading Strategies - Picking Strategies Based on Market Conditions
In order to fine tune your trading strategies with a given market, you must first have a method of classifying the market into certain types.
An example of this would be to have the market classified as either bull, sideways or bear.
This classification schema has to do with the nature of the primary trend in time frame you are considering.
You might also add a classification based on market relative volatility such as quiet or volatile.
To add complexity you could consider three states based on volatility such as quiet, normal, and bold.
Taken together these two dimensions, trends and volatility, could give you either a six state or a nine state classification scheme.
What's most important about your chosen scheme is that it gives you insights into typical market behavior and the kinds of trades that should work inside of that state.
If your classification scheme does not differentiate the market in terms of expected performance, then you're skiing is not really adding value.
The difference in market conditions must make an actionable difference for you or it's a waste of time.
If your scheme does provide insight power, then you can start matching it to your understanding of your own trading strategies.
You want to figure out which ones work best in certain market conditions.
For example: trend following systems should be much more effective when the market is either in bull or bear since the trend is clearly identifiable and people that are in positions already have a vested interest in supporting the trend by buying or selling on dips.
In sideways conditions however strategies like channel trading or fading the breakout or band trading should be much more effective.
Sideways markets feature narrower opportunities to take profits.
In sideways conditions then you would expect different strategies to be optimized.
The more you understand the principles and theories behind your trading systems, the easier it will be to pick those strategies that will work best.
You will also want to examine typical length of the trade compared to the normal market behavior in each of your market conditions.
That will tell you if the parameters for your preferred trading system are in tune with current market conditions.
If your trading strategies are related to fundamental analysis like the state of the business cycle that may direct you towards different sets of potential trading targets.
For example, when the business cycle is near the end, you may discover that consumer staples are much more favorable than consumer discretionary stocks.
Simply changing the target set may add a considerable amount of value to your strategy.
An example of this would be to have the market classified as either bull, sideways or bear.
This classification schema has to do with the nature of the primary trend in time frame you are considering.
You might also add a classification based on market relative volatility such as quiet or volatile.
To add complexity you could consider three states based on volatility such as quiet, normal, and bold.
Taken together these two dimensions, trends and volatility, could give you either a six state or a nine state classification scheme.
What's most important about your chosen scheme is that it gives you insights into typical market behavior and the kinds of trades that should work inside of that state.
If your classification scheme does not differentiate the market in terms of expected performance, then you're skiing is not really adding value.
The difference in market conditions must make an actionable difference for you or it's a waste of time.
If your scheme does provide insight power, then you can start matching it to your understanding of your own trading strategies.
You want to figure out which ones work best in certain market conditions.
For example: trend following systems should be much more effective when the market is either in bull or bear since the trend is clearly identifiable and people that are in positions already have a vested interest in supporting the trend by buying or selling on dips.
In sideways conditions however strategies like channel trading or fading the breakout or band trading should be much more effective.
Sideways markets feature narrower opportunities to take profits.
In sideways conditions then you would expect different strategies to be optimized.
The more you understand the principles and theories behind your trading systems, the easier it will be to pick those strategies that will work best.
You will also want to examine typical length of the trade compared to the normal market behavior in each of your market conditions.
That will tell you if the parameters for your preferred trading system are in tune with current market conditions.
If your trading strategies are related to fundamental analysis like the state of the business cycle that may direct you towards different sets of potential trading targets.
For example, when the business cycle is near the end, you may discover that consumer staples are much more favorable than consumer discretionary stocks.
Simply changing the target set may add a considerable amount of value to your strategy.
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