T2W Trading Community

How important are breakouts and pullbacks in your style of trading?
I have a number of different pullback systems that test well. I change the position sizing and exit strategies depending on the current market conditions. The market will not adapt to us, we must adapt to it and one of the ways to do that is by adjusting position sizing and exit strategies based on market conditions.

Many traders focus on various types of breakout strategies because there are several popular books describing them. These approaches tend to work in Bull markets, but the results are marginal in trading range markets and there are better approaches to use in trading range markets.

I ran several tests that involved buying the QQQQ when it made new ten and twenty day highs and compared the results to buying the QQQQ when it made a new ten or twenty day low. In both cases the positions were held for five days then sold. Over the past three years all four approaches showed profits, but buying the ten and twenty day lows and holding for five days far out performed the approach of buying new highs. This is one reason that a number of professional traders have some type of pullback system in their toolbox.

Much of what traders hear about market behaviour or trading is just wrong. Don’t trade any system until you have tested it yourself and clearly understand how it performs in different market conditions and with different filters. Readers may wish to refer to one of the articles on my web site, www.daisydogger.com that outlines some of the testing process I use before trading a system.

What type of technical analysis do you find works best in the current Bull market? (And will that analysis still hold in a Bear market, or will it be different?)
I have clearly defined systems for Bull, Bear, and Trading range markets. Each tool has been tested in all three market environments and I clearly understand how the tools perform during the transition from one type of market condition to another. Using the same system in all three market environments will give you a lot of practice at taking draw down’s.

Trading pullbacks in up trending stocks during bull market conditions tends to work well. The same system may be used when the market is in a wide trading range, but the exit strategies and holding times need to be different because of the way that stocks behave in trading ranges. In this case the same ‘technical analysis’ or system may be used in two different market conditions, but unless the holding times and exit strategies are changed the results will be poor.

New traders tend to focus on learning one system and trying it in all market conditions. After several consecutive losses they try another system, and then another, in a never ending search for the ‘holy grail’ of trading. Many new traders think that if they just have one more piece of information they can avoid losing trades, and see huge returns like are claimed in the slick brochures we all get in the mail. There is a difference between a marketer’s illusion and the real world.

Do you think mechanical traders can be just as successful as those that analyse the markets each day themselves?
Yes.

Do you think ‘more’ or ‘less’ is better when it comes to indicators?
Less is clearly better.

All indicators are derived from price and volume. Learn to read the supply and demand demonstrated by price and volume charts, and leave the indicators to the marketing people. In looking at fifty different indicators I have not found one that is strongly predictive by itself in all three market conditions. Traders should not have anything on their charts that has not been clearly shown to be predictive.

Many traders use Stochastic and the MACD to help them with trades. When I teach trading techniques at seminars I show backtesting data that illustrates that neither of these is particularly useful in timing the market. People agree with the data but continue to use them anyway. There is some comfort is using Stochastic to see that a stock is oversold or over bought. The problem is that over bought often becomes more over bought, especially in trending markets. The Stochastic as defined by George Lane relates current price levels to the 21 day price range; this is something one can clearly see on the price chart so the indicator offers nothing new.
Stop looking for the perfect indicator, it does not exist. The marketing guys have made more money selling new indicators than the people using them. Most successful systems are very simple, and are used by people who have thoroughly analyzed them in various market conditions. There are few if any systems that work well in all market conditions. You will come closer to the ‘holy grail’ by learning to analyze current market conditions and select the proper tools than you will by focusing on anything else.