Are You Ready For When Your Trading Strategy Begins To Fail?

Posted in: Advanced Trading Strategies, Trading Article, trading videos

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Markets and the traders that trade in each market, are constantly in a state of change.

No two trades are ever exactly the same and that’s even if we’re looking at the same instrument on the same day in the same market phase.

But markets evolve over time as they  change technically, trading technology changes, strategies advance and adapt, financial conditions change and the political climate varies.

There’s  a constant need for balance between the desire to perform consistently and a traders evolution in this ever-changing business.

Trading is an uncomfortable profession. We tend to lean towards the known and the usual, rather than the uncertain and unfamiliar and that can cause us grief.

 

Trading Is An Ongoing Learning Process

The trouble for traders who are trying to make it, is that they are looking for something that works.  In a market that is becoming increasingly efficient, that is not a small undertaking as edges in the market are small.

Once traders find something that does work, they tend to focus on it.

This is good to an extent – getting really good at executing a trading strategy and understanding it fully can make a huge difference to your trading results –

The danger is when a traders is so focused on their winning trading strategy that they fail to continue to learn about the market as the markets continue to evolve.

Traders are comfortable in the false knowledge that they’ve found their way to trade.

But when the trading strategy starts to fail, the trader goes looking for something new and so the long and often painful process of finding a winning strategy starts all over again.

 

Market Changes Can Hurt A Unprepared Trader

When the markets inevitably change, it’s these traders who are inadequately prepared who usually suffer the most.

They are likely to be less responsive to changing conditions and as they’ve had some success, they’ll probably have increased their position size and this creates a situation where there is great potential for them to be extremely vulnerable.

When a trader is doing well, it is easy to decide to increase the risk on a set of trades but as we know, wins and losses come in a random distribution.  Add the changing conditions of any market, the potential for disaster is clear.

BITCOIN - CHANGES IN MARKET CONDITIONS
BITCOIN – CHANGES IN MARKET CONDITIONS

Bitcoin, using any trading strategy that was long only, was a great speculative money maker.  As big gains were being made, there is no question that traders were increasing position size to reap the rewards of the big run in price.

Markets change and if you failed to adapt, you missed the point where the easy trades were finished.

 

Make Money But Remember The Bigger Picture

You need to be constantly learning, developing and refining your trading methods, even if you’ve found a strategy that’s currently working and are happy with keeping it as it is.

But how do you do that without looking for new setups?

The answer is that you’re learning about the framework within which the market operates. So at the same time as you are trading, you are also noting how the market is moving and what it’s responding to.

  • Is the market trending or is it in balance as we see in the above Bitcoin chart?
  • How does it break out of balances and what happens at the end of a trend?
  • What effect is the volume having on price movement?
  • How freely is the market moving?
  • Is it volatile or quiet and how does this effect different types of strategy you are using?

Realizing that there is so much information out there, a great deal of which you will never know, is key to the process of building a robust framework of how you will trade.

There are many different considerations in building up your understanding of how a market trades and like with everything else in trading, it may change over time.

If you are able to build a robust enough framework and market understanding, you’ll find that new opportunities to develop strategies present themselves far more readily and additionally you’ll learn more about the setups you currently trade.

But more than anything else, having a broad framework for the market and keeping a close check on how it’s trading relative to your expectations, allows you to remain nimble enough to recognize changes to the market that could cause your methods to start to fail – and quickly see different ways to trade that could work in the new trading environment.

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