Do you know under which market conditions / environment / regime your strategy performs at its best and at its worst? Knowing this can be of great benefit to traders.
First off, what do I mean by market conditions?
By market conditions I mean whether the market you are trading is:
- Trending or in a range.
- Very volatile or on the quiet side.
… or a combination of 1 and 2 above.
How is the above helpful?
Because a strategy’s performance will differ from one market condition to the next.
As an example, let’s say you have some sort of trend trading strategy… such a strategy will perform much better in a trending market than in a range bound market.
The same can be said about volatility in markets. Some strategies are more conducive to quiet markets while others are more conducive to volatile ones.
What can you do when the market environment and your strategy don’t align?
- You can continue to trade as normal but there will be the risk of getting chopped up.
- You can continue to trade, but with a smaller size.
- You can trade less.
- You can stop trading till market conditions are back in your favor.
… or a combination of some of the above.
How do you know the market environment is changing?
This question is not so easy to answer.
One way is to study your backtesting results. This will give you a good idea of how your strategy performs in different market conditions.
Another (and simpler) way is looking at your profits for feedback. When you’ve been trading for a while with decent results and your strategy starts to underperform, it’s possible the market conditions are changing.
The above is not extensive, but offers a good place to start. In the end the longer you stay in the game the easier it gets to identify changes in a market; experience is key.
Finally:
Remember that there is no shame in staying out of the market, trading less or trading smaller size when there is no edge for the strategy you are trading. Preserving your capital till market conditions are more favorable should be a top priority for traders.
Thanks so much for reading. Hope you enjoyed this post. Hope you and your family are well and safe.
Thanks and Regards,
Trading SOS SOS