Profitable ETF Trading Strategies – Adapting to a Dynamic Market

Ken Long asked:

The market goes through changes all the time, as market participants and their methods and objectives change through time.?Sometimes trend following will dominate, sometime reversion to the mean trading will be effective, other times channel trading with strict profit targets will work.
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It is normal for traders to develop preferred methods of training, based on our experiences and our preferences, and our style of trading and our chosen markets. It is normal to have periods of time when your preferred methods are especially effective, and other times when it is heavy sledding.
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As market conditions and patterns change it is normal to see a change in how effective our chosen methods perform. Since market conditions change in unpredictable patterns and over changing periods of time, it is never easy to formulate rules that govern how to navigate these transitional states.
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If you are looking to be a full time trader, you can expect to have to routinely sense and adapt to changing market conditions on a regular basis. It is worthwhile then to develop a mind set that expects this kind of routine change, and a system to routinely manage the transitions.
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Here are some things you can do to help you stay in tune with a dynamic market
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1. Reduce the frequency of your trading so that you only trade patterns that strictly meet all of your preferred criteria.
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2. Trade at reduced risk levels?and reduced size until a new pattern of performance emerges.
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3. Monitor the moving average of your trade results to be alerted to reduced performance quality which can signal a change in market conditions sooner than is evidenced in individual technical indicators.
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4. Have a variety of systems and strategies that are known to outperform in certain market conditions, so that your action plan adapts to a changing market.
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5. Use adaptive risk measures that fine tune your system so that your system parameters remain routinely aligned with market conditions.?Having trailing stops that are a function of Average True Range (an adaptive market indicator) is an example of this kind of adaptation.

Manuel

Profitable ETF Trading Strategies – Efficient Markets? Being Vs Becoming

Ken Long asked:

There is a world of difference, all you need really, in the difference between these 2 statements:? the market IS efficient and the market becomes efficient.? It’s the difference between a state of being and a state of becoming (a state of action). A market moving towards efficient price levels is a market in motion, a market that can be detected and traded.

If the market IS efficient, then there is no edge. It is already at the precise and proper price for current information.? If the market is becoming efficient, then we are in a state of action with the market and price seeking to move in the straightest line to the new proper price. And in that movement, an edge is born.

It remains to be asked then, under what conditions is there a tradeable edge for an individual in the relentless drive to the new proper price?

I think we need to find those moments and targets where the greatest emotion and the greatest extremes can be found.? Those areas have to be the place where irrationality is greatest. Irrationality is the other side of the coin from efficiency, which has the iron logic of dispassionate calculation driving it. Irrationality is a relative condition and can be found where emotions are greatest. When we have Obama as president, surely that’s a signal that we are in unusual political and economic situation, one in which new definitions of normal are sure to arise. It is in this transition state that a new efficiency will be born, and the market will move to that new level.

Pick your time frame, and look for price performance that is the most extreme for a target relative to itself , relative to its peer group and relative to the market.? Consider the following idea.? Those most extreme moments are a signal for a probable residual wave of reaction.? You will always be surprised by market moves if you are in the position. If you want a safer and more reliable movement, wait for the turning point of the move at the end of the exhaustion, the moment of pausing and hesitating when the balance of power is preparing to shift.? Will you always get it right? No, you will never get it right, or at least that is the way to approach it.? But thru a sequence of carefully measured step-wise entries, you stand to make reasonable trades in short periods of time when you have the edge.

This style of trading will never hit the homerun, but it will give you a risk-measured way of navigating chaotic markets.? This strategy always misses the first move, it is prepared for the 2d and 3d move. Sometimes herd leaders run off a cliff.? Dont be that guy.? Be the 2d mouse.

And once in a while you WILL hit a homerun. Just be surprised by it, don’t count on it.

Eileen

Profitable ETF Trading Strategies – Sources of Psychological Pressure For Mechanical Traders

Ken Long asked:

A lot of professional traders manage the complexity of the human psychological dimension of trading by removing their emotional judgment as much as possible from the system. ? They know that they cannot completely eliminate their psychology from their trading, because they know some or all of the following issues will continually come to the surface of their attention for resolution. Each of these common occurrences are likely to generate considerable psychological pressure that must be addressed even with the best mechanical system around: ?

1. the purpose and objectives of their system

2. their appetite for risk

3. their capacity to manage the risks that they get (often more than their appetite)

4. their own response to the system’s performance

5. the response of their significant others to their system performance

6. a changing market that seems to have altered the availability and frequency of normal returns on capital (when you see other people making “easy money” and you are not, the temptation to intervene is large).

7. their response to client concerns and ideas if they are professional money managers.

8. a willingness to look for new opportunities and edges in changing markets

9. a need to feel personally connected to your trading

10. a need to feel that you are responsible for your winning results, through your own actions and decision-making

All of these issues will become an integral part of the psychological dimensions of your trading. Some are positive and some are negative, and some depend on the particular results your mechanical system is getting. Each one though puts pressure on you to change your rules to accommodate the emotion that it generates. ?

It takes a special kind of preparation and discipline to be able to trade a proven, back tested mechanical system strictly according to its rules.? We are not naturally inclined to follow these kinds of systems which leads to so may decent systems being cast aside unfairly. Be prepared as a trader to manage these pressures. Notice I didn’t say resist, because resistance creates its own problems later down the road. It is necessary to anticipate and then manage these emotional responses for the long term health of your system, your self and your bottom line.?

Mathew

Profitable ETF Trading Strategies – Trade Like an Autobahn Driver

Ken Long asked:

Support and resistance levels create congestion zones around certain price levels. In congestion zones, there is no clear indication if the follow-on trend will be either up or down, as bulls and bears are wrestling with each other for control of price.?

A congestion zone on a chart occurs when price is moving sideways, and there is no clear trend up or down.? It is not unusual to see days and days of sideways movements on daily charts.?

There are times when price has cleared a congestion zone by either breaking out to make new highs or by failing and falling quickly back towards lower price levels.?

Adapting your trading strategy to these different conditions can be improved by having a useful trading metaphor or organize your thoughts and remind you of how to interpret price action.?

A good trading metaphor should be aligned with your primary learning mode: visual, auditory or kinesthetic.? The best metaphors find a way to incorporate all 3 modes, to reinforce the power of the story and the underlying organizing principle.?

One of my favorite metaphors does just that:? Trade like an Autobahn driver drives. ?Here is how it works:?

The autobahn in Germany is a marvel of engineering and freedom. For vast stretches of expressways between major cities, you can drive at unlimited speeds. ?There are multiple lanes, traffic is spread out, and you can see clear road ahead for miles. ??Driving here is like trading a breakout where you get onboard early and are swept along by the unconstrained power of buyers everywhere, all pushing price ahead at great speed. ?Enjoy the ride for as long as it lasts, but be conscious of traffic ahead and the inevitably city ahead which will add to traffic and necessarily slow you down.?

The autobahns around cities can be very dangerous, and conditions can change swiftly, especially in times of bad weather. ?Traffic increases, road surfaces get slippery, there are many more exit and entry ramps with both local and long haul drivers each seeking to accomplish their purpose on the road. ?

Not everyone is there for the long haul.? People change lanes rapidly trying to gain a momentary advantage which leads to choppy traffic patterns which are unpredictable. ?This is like trying to trade in congestion areas.?

You cannot expect to apply a single set of simple rules to both kinds of road conditions or both kinds of price areas.

To be safe and productive, you must adapt your rules to the conditions of the road or the trade. ?Drive and trade the wide open spaces in one way, to maximize your profits and save time when the conditions warrant such technique.?

Drive and trade carefully and in a risk managed way in congestion areas if you must drivce or trade at all.? Don’t be hesitant to pull over and let traffic clear before you re-engage. We have the freedom to trade when and how we will and we will be rewarded by waiting for our most favorable conditions to try our hand.?

Know what the road ahead is going to be like! Read the maps!? Listen to traffic and weather ?reports and pay attention to the traffic around you to guide you safely and profitably.

Eleanor

Profitable ETF Trading Strategies – Applying a Master Belief List

Ken Long asked:

Now that you have a comprehensive list of your beliefs concerning self, the market, and systems, you have a core foundational philosophy that you can apply towards trading.

You have a framework that allows you to evaluate the ideas of others and the opportunities that will suggest themselves to you throughout the course of your trading day, even during execution of other tardes.

As you sharpen your eye, based on your core beliefs, you will see things in a new way., which is a powerful feature of the master belief list.

You wouldnt expect the coire beleifs to change that much or that often, but we want to be open tot he possibility of having breakthrough insights that fundamentally shift our perspective. Until that happens though you have a keystone that holds together your various strategies in a unifed way.

The master belief list should be reviewed monthly as part of your after action reviews.

If you find yourself struggling with discipline and sticking to your stated trading plan, then it may become necessary to re-visit the list more frequently. If I need to really get back to basics because of a run of bad form or a losing streak thatis troubling, or because I have been away from the market for a while, I will scan my list on a daily basis to make sure I have the proper mind set.

How you use the list will of course be based on your preferences and personality. No matter what though, I strongly recommend that you make the list work for you in an important and routine way

Brian

Profitable ETF Trading Strategies – The Power of Backtesting

Ken Long asked:

The purpose of this article is to make the strongest case possible for back testing as a crucially important way of understanding your system. In other articles I will suggest that too much back testing is bad and that you can learn too many wrong lessons if you’re not careful. That said however, back testing is an essential part of a complete trading plan.
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Back testing can take many forms. In some cases an experienced trader who is considering an idea that is similar to previously reliable systems may only need a minimum of back testing to be convinced that idea is worth trading with live money at a reduced risk level. There is synergy in professionalism and experience that should not be neglected or underestimated.
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But even an experienced trader should carefully consider the results of a detailed backtest when taking on a new strategy or operating in a new time frame in order not to be misled by the constraints of his own experience.
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Some people are not convinced by the quality of an idea unless they see it work over multiple time frames, in multiple markets and in all different market conditions. Others are satisfied that an idea only has to work within the definable set of parameters to be tradable.
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This is a matter of personal taste since it comes down to a personal risk of capital rather than an academic exercise in the pursuit of absolute truth. Leave that for the academics. We want to make money as traders.
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Properly constructed, back testing will identify whether or not this idea has a persistent edge, and under what conditions it will manifest. By properly controlling for different parameters we can isolate those which add the most value to this particular proposition. We can test for robustness and see how sensitive the edge is to changing parameters.
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We may be able to identify specific market conditions where the edge is significant and tradable. We may be able to identify a subset of the total market trading targets in which this idea works best.
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Back testing should tell us what the win rate percentage is likely to be, the importance of slippage and commissions, the trading frequency, the maximum adverse excursion, the longest normal winning and losing streaks, and both the maximum and average wins and losses.
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One of the most important result sets for analysis is the distribution of results in the form of a frequency histogram. We would like to see a somewhat normal distribution that has most of the trades clustered around the mean and with an orderly profit tail to the right that suggests we have the possibility of large winning trades. We would also like to see a carefully controlled left tail of losses which suggests that we are able to engineer our risk carefully.
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Having this kind of data in hand allows us to determine where, when and under what conditions this idea is tradable and what the expected results should be. When we proceed into live market trading as a prototype system with much reduced real risk, we can then compare actual results with live money to backtest results to see if the trade can be managed as intended.
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Under these kinds of conditions and looking for this kind of information, back testing is an important part of the traders’ repertoire.?

Gail