# Adapting strategies to suit the market



## nomore4s (29 October 2009)

This thread is a bit of a follow on from the Edge thread. In that thread I talked about adapting your strategies and trading to suit the market conditions.

As it now looks like we are entering a new phase of the market and I'm in the process of changing my strategy for how I will trade over the next 6 months or so, I thought it would be a good time to start a thread showing how I do this.

Before we start a disclaimer of sorts. This is purely how I address my trading processes and goals to suit my trading over the markets and time frames I trade. I'm only a mildly successful trader and these ideas aren't going to suit everyone and other traders may find they will not work for them. I welcome any feedback and other examples from other traders.

Alright lets get started.

*My strategy for the last 10-12 months* - Once I had identified a major low had been put in or was close to being in and a strong rally was probably going to happen I started buying stocks looking to capture the larger trends that would develop, this buying started in Dec08/Jan09. I documented a couple of my portfolios on my blog if anyone wants proof.

Basically I was looking for stocks that had built solid bases or had broken out of trading ranges and were beginning to trend. I then brought into those stocks using various entry triggers.
While I did very well during this period I could have done a lot better but a lack of experience cost me some $, but the experience I gained was probably worth that cost.

*New strategy of the next 6 months or so*
This strategy is based around my ongoing analysis that I have been posting in the XAO thread and if that pattern starts to fail or my outlook on how it will play out changes so will my strategy on how I trade the markets.

Now basically instead of trying to ride trends higher I will be looking to capture smaller swings of the market. I'm now going to be looking for different patterns that will let me capture these swings and should suit the conditions - these patterns are based on my trading & research.

1. Shorts - I don't short that often due to it being difficult to get stock to short and the fact I don't find it as profitable to short stocks for various reasons. But I will now be looking for stocks that put in lower highs by breaking support and then retesting these zones and this is where I will be looking to enter my first lot of shorts. If we do start to see a sustained down trend with the overall market I will then look for continuation patterns to enter shorts.

2. Longs - I think the first stage of this period will possibly see some choppy trading conditions which will make it difficult to trade longs, so longs will be taken sparingly and will have tight trailing stops when they are taken. Again as the market makes it's mind up as to which way it will move we might see some rallies in which we can trade longs but again a tight trailing stop will be applied.

3. General - I don't expect to make anywhere near the money I made in the last 9 months in the next 6 months and I also think I will have to work harder for it. I expect my win/loss %to stay relatively the same but my R/R to drop off by quite a bit. I also don't expect to take as many trades as what I have been taking (this is a method of reducing my risks).

4. Looking for the next phase - I will be continually monitoring the market for signs that my analysis of current market conditions is wrong or we are starting to enter a new phase of the market which I will then adapt my approach to suit those conditions.

5. Be flexible - Try to remain flexible and and adapt to the conditions, if any of the above isn't working I will not stick with just because it is my strategy - I will re-evaluate and try to apply something that will work or sit out of the market till I have conditions I can trade with more faith.

How I apply this new strategy to my trading and my ability to read the market and patterns that I trade will have a big say on how profitable or how much money I lose in the next 6 or so months.

The reason I use this sort of strategy layout is I find it keeps me focused on the current market conditions and what sort of patterns that are likely to prove the most profitable and what I want to achieve from my trading for this period. It is only a guide and a small part of my trading plan.


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## skc (30 October 2009)

nomore4s said:


> This thread is a bit of a follow on from the Edge thread. In that thread I talked about adapting your strategies and trading to suit the market conditions.
> 
> As it now looks like we are entering a new phase of the market and I'm in the process of changing my strategy for how I will trade over the next 6 months or so, I thought it would be a good time to start a thread showing how I do this.
> 
> ...




What a cold lonely thread?

Just curious... did you have the same thinking back in mid Jun when the rally looked out of puff / reversing then?


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## nomore4s (30 October 2009)

skc said:


> What a cold lonely thread?
> 
> Just curious... did you have the same thinking back in mid Jun when the rally looked out of puff / reversing then?




No, my analysis was still saying we were going higher.

https://www.aussiestockforums.com/forums/showpost.php?p=459839&postcount=6630

https://www.aussiestockforums.com/forums/showpost.php?p=459839&postcount=6630

This is the first time since Dec/Jan I have looked to change my strategy. I will continue to monitor open trades as per plans but new trades will be taken with new strategy in mind. I might be wrong and the market could shoot up to 6000 in the next six months but if that is the case I will probably make more money then if the above analysis plays out.

This strategy is purely a guideline to how I think it will be best to handle the market going forward but it doesn't mean I will shut my eyes to other opportunities that might present, I will trade what is in front of me and what the market offers up.

TBH I'm in a bit of a holding pattern atm, I'm cautious of taking any new longs on anything but short term trades and I need to see confirmation this rally is over before entering any shorts with conviction, so I'm pretty much on the sidelines until I see conviction in either direction but I do still have a bit of money in the market.


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## skc (30 October 2009)

nomore4s said:


> No, my analysis was still saying we were going higher.
> 
> https://www.aussiestockforums.com/forums/showpost.php?p=459839&postcount=6630
> 
> ...




I know what you mean and feel exactly the same way. The only real money I have in the market are on takeover targets and my index fund. I also deactivated most of my stop-buy orders (some of which would have been triggered today). 

It is an environment great for completely alternate strategies imo.. like market neutral option strategy. Unfortunately they are too hard for me.


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## nomore4s (30 December 2009)

I have been meaning to update this thread for a while but I haven't been able to find the time.

Since my first post the market has pretty much been trading sideways, although it now looks like it is readying itself for a break to the upside which of course would require me to update my strategy.

The last 2 months while offering some opportunities hasn't really suited my trading methods and as such I have been quite happy to step aside to a certain extent - in the last 2 months I have only taken about half the amount of trades I did in the preceding 2 months for a modest return. I also changed the criteria for the long trades I took and was looking to capture smaller moves with tighter stops.

I'm actually happy with this as this could have been a period I suffered some drawdown but by changing my strategy when I did I was a lot more cautious in my trading. There are times I prefer to sacrifice some profitable opportunities to protect my capital. If I had kept trading the same set ups and strategies I was using since March I would have without a doubt suffered some sort of drawdown.

Going forward I'm now looking for confirmation of a break to the upside and have quite a few set ups pending as well. IMO if we do break up from here we could get another sustained trend and I will change my strategies and trade accordingly. If we don't break up my current strategies will remain in place until I have a clearer picture of the market conditions & directions.

It took me a long time to realise just how much effect the market conditions had on my trading. Nearly everytime I've reviewed periods of drawdown it has been because I've been reactive not proactive to the market conditions changing. Since I've been more proactive my drawdown periods have reduced and when I do go into drawdown it is nowhere near as deep anymore. If I change my strategies at the wrong time it might mean I miss some opportunities but I'm happy with that as there will always be more opportunities in the market but my capital is a limited resource.


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## lukeaye (2 January 2010)

Hi nomore4,

My strategy has been virtually the same the last 8 months.

Quite simply im buying from what i identify as a "low".

I identify this by a few things, Where support level is, Volume spread analysis, and retracement levels.

Here are a few of my current trades, i entered them just recently.

This is proof, that sometimes you don't have to over complicate things, simple strategies can work well. Ive included my statement just in case anybody starts throwing hindsight at me.


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## lukeaye (2 January 2010)

Here is the statement


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## nomore4s (2 January 2010)

lukeaye said:


> Hi nomore4,
> 
> My strategy has been virtually the same the last 8 months.
> 
> ...




Lukaye that's nice and I hope it all continues for you.

I have also done very well in the last 8 months as I'm sure most traders have but the point of this thread is about how you would change your strategies as market conditions change.

Would your strategy have worked as well in the 12 months prior to the last 8 months? Would you have traded the same way expecting the same results?

And how about going forward, do you expect trading conditions to remain as they are now forever? How will your trading strategy alter as the market conditions change?

I do agree with you in the fact you don't need to change anything for the moment just keep hitting those home runs but we will eventually see conditions where it might pay to be more conservative.


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## lukeaye (2 January 2010)

nomore4s said:


> Would your strategy have worked as well in the 12 months prior to the last 8 months? Would you have traded the same way expecting the same results?
> 
> And how about going forward, do you expect trading conditions to remain as they are now forever? How will your trading strategy alter as the market conditions change?
> 
> I do agree with you in the fact you don't need to change anything for the moment just keep hitting those home runs but we will eventually see conditions where it might pay to be more conservative.




To be honest, 12 months ago my strategies were quite poor, so i wasnt making money. I came up with a strategy recently which would have worked in that period, and i call that my basing strategy.

This strategy could work going foward as well. The difficult thing is identifying when market conditions have changed. I find it is only after certain elements have changed and given enough time to form, that we can identify if new patterns are emerging.

Looking at charts for the last 15 years i have found this strategy to work very well. Simple support trading, the only things i change is my exits. My exit may switch from a hold for an expectation of a full 5th wave with a fibonacci extention, to an exit between a swing point or resistance point.

I think the entry is probably the easiest part, the exit i find to be the hardest. At the moment, i have an expectation of a 5th wave advance in the XAO, which i predict will move us towards 5300. 

From there i suspect there could be a correction towards the old lows again, if history is any gauge. Whether i take shorts or not, im still undecided. But i will def be waiting for that confirmation of the low to take some more buy and holds.

So i guess the key for me is just altering my exits.


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## Wysiwyg (2 January 2010)

lukeaye said:


> This strategy could work going foward as well. The difficult thing is identifying when market conditions have changed. I find it is only after certain elements have changed and given enough time to form, that we can identify if new patterns are emerging.



I notice on your trade examples that there is no approximately equal allocation of funds to each position. Could you elaborate on what position sizing model you use please?




.


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## skc (3 January 2010)

Wysiwyg said:


> I notice on your trade examples that there is no approximately equal allocation of funds to each position. Could you elaborate on what position sizing model you use please?




Looks like standard fractional risk position sizing (i.e. x% of capital risked per trade), and hence the different position sizes. Also I'd imagine the stops as shown on the statements are no longer at their initial level.



lukeaye said:


> Here is the statement




Good results Luke. Just remember that the IG market chart's volume and price are often wrong. They don't include the closing auction price and volume.

Also, I note that base on your position sizes, you will lose more than your initial stop if the market gaps against you... so keep that in mind just in case the market turn when you are at your most aggreesive.


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## Julia (3 January 2010)

Luke, did you consider letting the profits run, rather than necessarily closing out the positions?


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## lukeaye (4 January 2010)

Wysiwyg said:


> I notice on your trade examples that there is no approximately equal allocation of funds to each position. Could you elaborate on what position sizing model you use please?




The allocation of funds is the same, as each position is given a % risk size based on my capital. SKC pretty much summed it up. Some of the positions enabled me to run much tighter stops then others, hence why some positions are larger then others. RIO enabled me to have the largest position.

The other factor which must be considered is the Margain amount. Each CFD position must have a set margain. In RIO's case that is 10%, where as in Molopo it is 20%. So effectively i can have half the position that i can have with rio, straight off the bat.




Julia said:


> Luke, did you consider letting the profits run, rather than necessarily closing out the positions?




Hi Julia, i am letting the profits run, i am still in all the positions.

I will trail my stops however based ony my analysis.


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## lukeaye (4 January 2010)

skc said:


> Also, I note that base on your position sizes, you will lose more than your initial stop if the market gaps against you... so keep that in mind just in case the market turn when you are at your most aggreesive.




Yes i am aware of this. The only way i can control it is G/STOPs. Although i encounter several problems with this.

1. It costs alot of money.
2. The minimum g-stop level is often so many points away from where i want it, i end up with nearly the position size i am after.

I do not have a solution for this problem. The only thing i can think of is changing brokers, but then i couldnt be bothered. I have only ever had a gap below my stop once or twice, and it didnt hurt that much. 

But i guess if you were in a situation where you were shorting AXA then a 38% gap would really hurt


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## Wysiwyg (4 January 2010)

lukeaye said:


> The allocation of funds is the same, as each position is given a % risk size based on my capital. SKC pretty much summed it up. Some of the positions enabled me to run much tighter stops then others, hence why some positions are larger then others. RIO enabled me to have the largest position.



Hmmm, that is interesting. So your position sizing model allows you to have a discretionary allocation of funds to each trade (based on your analysis for stop loss location) with a fixed percent risk per trade.
You could have a 30k position and a 2k position simultaneously.


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## lukeaye (4 January 2010)

Wysiwyg said:


> Hmmm, that is interesting. So your position sizing model allows you to have a discretionary allocation of funds to each trade (based on your analysis for stop loss location) with a fixed percent risk per trade.
> You could have a 30k position and a 2k position simultaneously.




Exactly, i could have 30k worth of stock or 2k worth of stock depending on where i can place my stop, the margain requirement, etc.

The only constant is the % risked, everything else is variable


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## Wysiwyg (4 January 2010)

lukeaye said:


> Exactly, i could have 30k worth of stock or 2k worth of stock depending on where i can place my stop, the margain requirement, etc.
> 
> The only constant is the % risked, everything else is variable



So how do you arrive at a dollar figure for each trade? Feeling lucky?


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## lukeaye (4 January 2010)

Wysiwyg said:


> So how do you arrive at a dollar figure for each trade? Feeling lucky?




What do you mean? Do you mean how much stock i buy?

Well if my account is 10 000 dollars, i will risk 2% per trade.

That means at my stop level i will loose $200.

Say im entering RIO at a level of 69.85 and my analysis says if it breaks 69.50 then i am wrong, it is avery close stop in percentage terms, so i can buy $25000 worth of stock, to risk $200.

If i am entering BHP and it is at $42.00 and my analysis says i am wrong at $40.00, then i may only be able to buy $8000 worth of stock to risk the same $200. So obviously i have a much greater chance of increasing my profit with RIO then with BHP, due to the much larger position size.

This also helps me pick which trades to take. The RIO trade i took was a very big position, because my stop could be so close.


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## skyQuake (5 January 2010)

lukeaye said:


> What do you mean? Do you mean how much stock i buy?
> 
> Well if my account is 10 000 dollars, i will risk 2% per trade.
> 
> ...




Do you use a constant 2% risk regardless of stock price/volatility? Eg TLS would be far less likely to gap around than say ROL


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## brty (5 January 2010)

lukeaye,



> Say im entering RIO at a level of 69.85 and my analysis says if it breaks 69.50 then i am wrong, it is avery close stop in percentage terms, so i can buy $25000 worth of stock, to risk $200.




On the 16/6/09 RIO closed at $73.23, on the 17/6/09 RIO opened at $57.

If the same magnitude fall happened on tomorrows opening, you would be down 22% on the position, or $5540.

Just because you have a close stop, does not mean the market will let you have it. The real problem here is that you are risking FAR more than $200 but don't know it. With the assumption that an extraordinary event can happen that goes way beyond your stop of 2%, you should look to keep this outlier at say 5% max of account size. In this case you should only be trading $25k of RIO if your account was over $100k in size.

Who is to say that a 22% decline from close to open is the maximum possible for RIO???

brty


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## lukeaye (5 January 2010)

lukeaye said:


> Yes i am aware of this. The only way i can control it is G/STOPs. Although i encounter several problems with this.
> 
> 1. It costs alot of money.
> 2. The minimum g-stop level is often so many points away from where i want it, i end up with nearly half the position size i am after.
> ...




Brty,

I do realise this, as i have stated in the above example.

Brty, i was also long RIO at that time anyway.

That was a result of capital raising, so i was entitled to the 1 for 3 share offer.

I actually made alot of money out of that.


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