Market Adaptive Trading Keeps You From Going Out on a Limb.

Market Conditions Must Drive Trading Techniques and Exit Strategies.

Using the same trading technique and exit strategy in all market conditions is likely to give you lots of practice at taking drawdowns. There is no single technique that magically works in all markets, no matter what those slick brochures we all get in the mail say. Experienced traders have a 'tool box' of different techniques that have been tested in different market conditions, and select the right ones for the current market.

I have a dozen different scans that I run every evening. There are scans that look for Long and Short Pullback set up's, volume accumulation, volume distribution, and various patterns. I have tested these scans in Bullish, Bearish, and Trading (sideways) Market periods; so I know which ones to use in a given Market environment. These scans constitute my Trading Toolbox. Prior to trading, I analyze the Market to determine which tool is right for the job.

It is the mastery of several different aspects of trading including system development, backtesting, exit strategies, and reading the market, that leads to success. It takes time, and it will cost you something to learn. Mastering the trading profession, like many other professions, can be well worth the tuition you invest. Traders develop their skills by working with someone experienced in the field. You don't become a surgeon, or pilot, or engineer by reading a book then starting a business. These professionals learn by working with someone until they master the techniques, traders should do the same.

Analyzing Market Conditions:

Learning to trade with the Market is one of the keys to taking results to the next level. Looking at Figure 1, it's clear that Long strategies with holding periods measured in Months were not trading with the Market during the 2000-2002 period. There are some Long strategies with short holding periods that worked during this period. There are also a number of Short strategies that worked during this period. Trading with the Market requires one to have a variety of strategies that are known to work in different Market environments, and a method for determining which strategy to use.

Figure 1. NASDAQ Three-year Chart

Analyzing Market conditions is so important that I write down my observations each evening as I prepare for the next trading day. I started sharing these observations with my friends, which encouraged me to focus on an objective look at the Market. It is this process which eventually let to publishing the Timely Trades Letter. The Letter is not an academic exercise, it reflects my trading plan for the current market and is based on 20 years of market experience and extensive testing. If you would like to see my current market analysis and the trading setups I am watching email a request to: sample@daisydogger.com.

I try not to be Bullish or Bearish, I just focus on determining key support and resistance levels, and what these levels imply for trading. If you decide you're Bullish or Bearish there is a tendency to then find reasons to justify your position, especially if you follow the news. Instead, determine what type of market environment it is, and what that implies about which of the tools in your toolbox should be used.

I have found NASDAQ trend lines and moving averages to be effective tools for determining which trading tools should be used. During backtesting I have found that several of my trading systems respond well to limiting Long Entries to periods when the QQQ is above it's 30 day simple average. I also use trend lines on the NASDAQ to determine whether to focus on Long or Short scans as shown in Figure 2.

Figure 2 shows a one-year period where the NASDAQ was basically unchanged. A long-term position trader may have broken even for the year. When the NASDAQ was below the descending trend line I would focus on Short set up's for swing trades. When the NASDAQ broke the descending trend line I began to focus more on Long set up's for swing trades. This is part of the process of selecting the best tool for the job.

Figure 2. Trading with NASDAQ Trend Lines

Figure 2 is a close up of the break out of the descending Trend Line shown in Figure 1. The first ascending Tren d Line after the break was drawn through the lows in early April and late May. As long as the NASDAQ was above this Trend Line, I continued to focus on Long Set up's. The break of this Trend Line in Early August caused me to stop taking Long Trades. A Trend Line break implies a change, which could be a basing period or the beginning of a retracement. I do not begin taking Short Swing trades unless there is a lower low formed after a Trend Line Break.

The retracement of early August in Figure 2 did not form a lower low, so I redrew the upward sloping trend line through the new low as shown on the chart. This new trend line then became one of the filters for determining whether or not to continue taking new Long entries.

When the Market is in a clear trend as shown in Figure 2, I generally use my tools for Swing or Intermediate term trades. When the Market is range bound as shown in Figure 3, I generally focus on Short Term or Swing trades. The pattern set up's for all three types of trading are similar. The Market conditions tell me which type of trading to do, and the type of trading determines the Stop strategy. To see my set up's for the current market email a request to: sample@daisydogger.com.

Figure 3. Range Bound NASDAQ