An Excerpt from the Timely Trades Letter.
The market has three basic modes. It can be going up, down, or sideways. Over time the markets movement is made up of combinations of these three different behaviors. None of these behaviors lasts for long, the market is always switching between them. This is one of the keys to trading. Traders need to recognize that the market moves between these three modes and have the ability to recognize then the change has arrived and be able to switch to trading tools suitable for the new environment. This is a process I call Market Adaptive Trading. The market will not adapt to us. It does not care what we want or think. Therefor we must adapt to it. For more information on Market Adaptive Trading visit www.daisydogger.com
If you scan through a daily or weekly chart of the market for the last decade you can quickly identify a number of bullish, bearish, and trading range periods. The entire chart pattern for the decade is made up from varying length bullish, bearish, and trading range periods. Since the market has been, and will be, made up of bullish , bearish, and trading range periods; it is important to know how a trading system performs during these different periods. I do not know if next year will be like last year, but I do know that the market action next year will consist of some combination of bullish, bearish, and trading range periods.
If I know how a trading system, or trading tool as I refer to them, performs in each of the three different market conditions; then I can watch the market to determine what type of condition we are currently experiencing and then use the tools...
that have shown good results in that type of market condition. This is the process of Market Adaptive Trading. It takes some practice to quickly recognize the current market conditions, but this is a lot easier that trying to predict where the market is going.
No one has consistently predicted where the market is going over the long run. Remember all those empty suits on the TV news shows telling us everything was fine just before the 2008 crash. They did the same thing before the 2000 crash. Not even (or perhaps especially) the experts can successfully predict market direction consistently. However you can learn to look at a chart and tell if the market is going up, down, or sideways. And that is actionable information, as opposed to someone’s guess of where the market is going to be in three months or a year.
I have found that it is better to look at the performance of trading systems, or money managers, by market condition rather than year. The market is unlikely to do exactly what it did during the last few years over the next few years. However, whatever the market does it will be made up of bullish, bearish, and trading range periods. Understand how a trading system does during these different market conditions can be much more useful than knowing how it did during specific years.
There are several interesting techniques for determining market conditions. Drawing trend lines, along with horizontal support and resistance areas on the market chart make each of the three market conditions clear. This technique is simple, but it also works. Markets trading above an ascending trend line are in a bullish environment. Markets trading below a descending trend line are in a bearish environment. Markets trading between horizontal support and resistance areas are in a trading range environment.
Steve Palmquist a full time trader who invests his own money
in the market every day. He has shared trading techniques and
systems at seminars across the country; presented at the Traders
Expo, and published articles in Stocks & Commodities, Traders-
Journal, The Opening Bell, and Working Money. Steve is the author of,
“Money-Making Candlestick Patterns, Backtested for Proven Results’,
in which he shares backtesting research on popular candlestick
patterns and shows what actually works, and what does not. Steve
is the publisher of the, ‘Timely Trades Letter’ in which he shares
his market analysis and specific trading setups for stocks and ETFs.
To receive a sample of the ‘Timely Trades Letter’ send an email to sample@daisydogger.com. Steve’s website:www.daisydogger.com
provides additional trading information and market adaptive trading
techniques.
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