The days when we could rely on a steady bull market to make our profits for us are long gone.
Instead, traders are more reliant on technical trading strategies than ever.
A good trading strategy will give us clear signals based on price action, without the will-they, won’t-they worries that we really can’t predict.
A trading strategy – be it one you’ve created yourself or one that’s bought off the shelf – is viewed by many as the financial equivalent of manna from heaven.
We love them.
We lap them up – ever hopeful that this will be the path to untold wealth.
However, too often I speak to traders who are disheartened and disappointed by their trading results.
What goes wrong?
I’m going to assume here that you’ve selected your trading strategy carefully – that you’ve gone from a recommendation, with some sound trading history, and from a reputable company.
So, if you’ve ticked all these boxes, why is it not performing as you’ve expected?
The next question to ask yourself is whether you’ve picked the right strategy for the current market conditions?
I’m talking very generally here, when I say that trading strategies fall into two very broad camps.
The two basic types are these:
1. Breakout strategies, which look for signs of momentum and follow the continuation of a trend.
2. Reversal strategies, which look for signs that the price is reaching a top or bottom and will change direction.
Now look at the market you’re going to be trading…
As a very general rule of thumb, a breakout strategy that relies on market momentum is very well suited to a trending market – it will allow you to make the most of market moves.
A reversal strategy, on the other hand, is a good way to take advantage of all the smaller up and down movements in a choppy market, where prices are actually changing relatively little over the medium-to-long-term.
However, it’s a little more complicated than that, because we also have to judge just how big those ups and downs are likely to be.
Sizing up the market
A long-term trending market is a great arena for a breakout strategy – but if you’re nipping in and out for small, quick returns, chances are you won’t get the best opportunities and will get knocked out by small bumps on the charts.
Likewise, a choppy, range-bound market is a great place to apply a reversal strategy, but if you’re looking for moves that are too large, you’ll constantly fail to reach your targets.
That’s why it’s so important to consider the size of the movements you’re hoping to achieve with your strategy – and to match those to the size of the movements the market is making.
If you have a market that’s chopping about sideways in a very small, stagnant range, and your reversal strategy is looking to pick up 100 point moves each day – you’re going to struggle.
Likewise, if you’ve a market trending upwards with a very gentle, steady gradient, you may be able to earn more points by playing the short-term ups and downs, rather than following that trend.
Current market conditions, however, have proved pretty difficult to pigeon-hole. There’s been no shortage of choppiness … there have been some strong trends … there have been some serious pull-backs …
This tells us that we have conditions that could maintain a reversal strategy, or take advantage of short-term momentum. As long as we’re mindful of the size of moves we’re looking for.
These are all the factors that I consider when I’m looking at trading strategies and weighing up their benefits.
