In my experience, there are many good strategies around, but they are only good under the right market conditions. What techniques do you use to judge whether market conditions are ripe for a particular strategy??? Backtesting? Works well but can miss the opportunity while waiting for confirmation that conditions are right. Currently I am working on an excel model to judge whether conditions are right to run a particular strategy... Anybody else use a method like this or am I chasing my own tail? Curve fitting? Any thoughts? Thanks
This should be part of your development process, otherwise it would be too late. Does your strategy work well in several markets? If not, the probability that is fitted is 99.999999%
Yes,you are chasing your own tail.Otherwise you should set up a gazilion displays for each strategy and monitor them altogether.It's impossible, unless you want to f..k your mind. I personally judge by my display(This may shorten your trip),when I see the "mess" on my display- then it's not my strategy.The display is set the way,if something "wrong"("wrong" means things that I don't want to look at right now;sure when some is wrong for one,then some is perfect for another,by I don't care),it's components start conflicting with each other.So,when I see the conflict,I usually wait for an agreement.
Assuming you are talking about U.S. equities or indexes - VIX The level of volatility in the market will often have a large impact on strategies, thus it is often helpful to engage VIX as part of a trading rule or system to make relative adjustments.
no kidding, I trade forex and I haven't figured out a way to incorporate VIX (forex vix) into the deal. I agree, it's not so much volatility messes up the system, but it messes up the position sizing. so no, I would not agree every system has it's day, a good system will perform all the time if you adjust for volatility and systems are usually pretty simple, and it can be a never ending search if everytime volatility changes you start looking for a new system. like the man said, time and energy would be better spent on volatility.
While I don't trade forex, I assume that you can develop a measure of TR (True Range), just looking at the relationship of recent highs and lows in your instrument, which should give you a measure of volatility comparable to VIX.
I think you are on the right track. I trade equities and the market tends to cycle through different repeatable themes every quarter or so. M IMO you want to be looking classify the market into certain themes...after you watch markets long enough you will notice them. I like to classify the market into direction and whether volatility is rising or declining. Volatility will have a large impact on trading strategies. As Vol rises or stays relatively high correlations will also be high. This will negatively impact any strategy that is short correlation and its usually tougher to hold overnights in this market. Taking advantage of big intraday ranges is a good idea. In a enviroment where vol is declining and correlations are as well. It is safer to extend holding periods and employ relative value approaches. Which is what I am now employing in this current market. You'll notice correlations have been breaking down for the past couple weeks and vol has been sucked out of the market. This quarter will be far different from last quarter...so take note!
I would say if your strategy is about BE in "bad" (for that strategy) market conditions, and makes decent money in "good" conditions, then your best bet is to trade it regardless of market conditions. But ... if you can forecast bad market conditions with quasi certainty, then it is better to turn your strategy off during these times. Example1: most systems perform poorly in low-volume conditions, and you can forecast the week in-between Xmas & new-year is surely a low-volume period (just like the last week of august, up-to labor-day). Example2: most systems perform poorly on options-expiration day. Example3: you might find that your system doesn't do well around news events - analyze your backtest results for entries in 8:30am-8:45am & 10am-10:15am windows. Example4: you might find your system doesn't do well the morning - or the afternoon - or during lunch-time (another low-volume window).
On some level, if it's a good strategy, it won't give signals in market conditions where it won't be successful. Try to design your strategy that way. In my case, my ES strategy was giving me trade signals left and right for a while, then, at the turn of the year until the end of April, it was like crickets chirping and I would be lucky to get two signals in a week and the performance was not at the same level as it had been in previous months. Then, in May and June, it gave me almost as many signals as it had in the first 4 months of the year combined and performance was twice as good as it had been from January through April.