Sunday 28 September 2008
You’ve been trading your system that works well in normal market conditions, you average a net return of around 3% a month and your system relies on relatively tight stops. Remember though that the system was designed to operate quite comfortably in what I said above…”normal market conditions”. So it stands to reason that in periods of excessive volatility you’ll probably get whipsawed (stopped out a lot) when the market starts to erratically fly around the place. This is also referred to colloquially as being 'chopped up'!
My intraday Trendcatcher methodology uses a 3 minute chart and a 12 point initial and trailing stop to trade the SPI. Over the last month or so the SPI has been having enormous ranges which is great for the Trendcatcher however, the pullbacks within a trend have been over 20 points much of the time. With that, I’m left with a couple of choices. Do I widen the initial and trailing stop to say 25 points to keep out of the ‘noise’? If I do that I’ll also have to adjust my ‘Quick-Kick’ level where I take profit on half the position and I’ll also have to adjust the number of points break of support or resistance I require before I execute a trade. So yes, I can do all that BUT the original methodology was designed for ‘normal market conditions’. I could of course come up with ‘Trendcatcher Version 2 for Huge Intraday SPI Volatility and Erratic Conditions’ or I could choose to sit on the sidelines and patiently wait until the SPI resumes its ‘normal market conditions’ which is exactly what I’ve done. In fact, I recently took had a holiday so I could recharge my batteries totally. I returned a week ago and still haven’t taken a trade.
Tinkering with a system is fine so long as the tinkering is in the early stages or the market has moved to new higher levels meaning the average daily range is greater. The initial stop and trailing stop on the SPI using Trendcatcher intraday was initially set at 10 points and then I widened it by 2 points as the SPI moved above 5000. That sort of minimal adjustment or ‘tweaking’ is sensible, logical and warranted. However excessive ‘tweaking’ in this environment is not as far as I’m concerned.
After 3 months of trading the SPI & Nikkei I’m currently up around 14% net for the 3 month period from 6 June to 3 September (based on a $A15,000 account). As I said, I haven’t done any trading at all since 2 August due to what I deem to be ‘abnormal market conditions’ as opposed to the ‘normal market conditions’ the methodology was designed for.
In summary, a Top Trader must identify when and under what circumstances their own methods work and when they have less of a chance of pulling profits out of the market. Sounds difficult I know and comes from experience in trading over time – one of the best rules of thumb in trading are “if in doubt get out” as well as “if in doubt STAY out.”
The markets will always be there for you when the time is right – just make sure you and your account are there too!
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