how to select strategy accoring to market condition?

Discussion in 'Strategy Building' started by flyingforget, Nov 23, 2007.

  1. the market changes all the time

    sometimes it is trending

    sometimes it is countertrending

    sometimes it is volatile

    how to select strategy according to market condition

    thank you
  2. Just correctly predict the future price behavior 100 % of the time and you should be OK.

    If you lack the ability to consistently correctly and reliably predict the future behavior of prices then you might want to place small bets and stop losses.
  3. shliang


    imho, telling whether current market condition is for one's strategy is crucial for profitable trading
  4. Agree with Hook N Sinker.
  5. MGJ


    The most common approach is to say the instrument you're trading can be in one of several "conditions" or "states", and then use different mechanical trading strategies for each of the different states. For example a long-only mutual fund trading system might define two states and use two trading strategies
    • Use (some collection of indicators) to decide whether the instrument is in the "Bullish" state or the "Bearish" state
    • If state = "Bullish", use the Buy and Hold trading system
    • If state = "Bearish", use the Sell Everything Immediately And Go To 100% Cash trading system
    A long-and-short trading strategy for ETFs might define three states and use three trading strategies
    • Use (some collection of indicators) to decide whether the instrument is "Trending Up" or "Trending Down" or "Choppy and Trendless"
    • If state = "Trending Up", exit all short positions and use Trading System A to trade from the long side
    • If state = "Trending Down", exit all long positions and use Trading System B to trade from the short side
    • If state = "Choppy and Trendless", exit all positions and use the Sell Everything Immediately And Go To 100% Cash trading system
    (lots of people like to set Trading System B = (the exact opposite of Trading System A) so they can claim "I trade longs and shorts using the very same rules" but this is not a requirement).

    Some traders like to define more than 3 states and employ more than 3 trading strategies. A classic example has four states and uses four strategies
    • Use (some collection of indicators) to decide whether the instrument is in one of the following states
    • Trending Up
    • Trending Down
    • Range bound with well defined Support-and-Resistance
    • Neither Trending nor range bound
    kut2k2 likes this.
  6. For long only trend following systems, I know of some people who use index filters.

    Some have them set for if the index is in a downtrend, their systems turn off, for some this means they don't buy anymore but keep all current positions open until an exit is hit as per normal. For others it means they sell

    Though I must say these index filters are not universal in their approach. For some long term trend following systems, this approach gives no advantages, as its hard to know when to get back in, and often by the time you are back in, you'd have missed the aggressive rebound, so the net result is breakeven.

    I speak only of long term trend following systems because that's where I've done my research.

  7. how to select strategy according to market condition?

    One has to have set criteria to measure different aspects of market condition and one's trading methods/systems should be structured to take advantage of recurring favorable conditions.

    So, one should not try to fit different strategies for different markets but wait for favorable conditions for the profitable methods one have.

    I would call this a "from bottom up approach" as opposed to the testing of zillions of combinations without a clue of the nature of the markets.

    As an example, when swing trading stocks I have the following main components to my method:

    -relative volatility: don't touch anything that is not at least twice as volatile as QQQQ.
    -relative strength: position in peer group and in relation to market.
    -trending: position in channels and relation to averages,
    -momentum: position in swing formation as deciphered from oscillators.
    -volume: ebb and flow of volume as it reveals the momentum in participation or lack of it.

    Needless to say the above is the first pass and I also check other time scales. Even at that stage it is intricate and can not be back tested , but it works.

    I use a similar but simpler method to scalp futures.

  8. just buy low and sell high
  9. Even if I knew, although I tell you I do not, I would not tell you.

    This is the 42,000,000 $$$$ question

    Nice try though...

  10. Nope.
    For me its buy high then sell higher.
    #10     Nov 25, 2007