Importance of market direction

[Kunal]

Hi everyone,
I've done a bit of backtesting on various systems and found that almost any long signal generated by ma, rsi, stoch etc seem to work best when the overall market is in bull mode.
When the market is in bear mode or choppy, the same signals tend to lose or show a very tiny profit.
When systems seem to be so dependent on overall market direction, how do you trade in a bear/choppy market? Or do you only trade when the market is in a bull phase?

 

[fudgestain]

What do you expect?
The trend has to end at every bend.
The money is in the gyrations (eg index futures or index spreadbetting).

 

[timsk]

When systems seem to be so dependent on overall market direction, how do you trade in a bear/choppy market? Or do you only trade when the market is in a bull phase?

Kunal,
If traders were only active in a bull market - or only made money in a bull market at least - then few of them would have traded for the first 3 years or so of this millennium! And, on this premise, those that did would have lost money. What happened was that longer term traders/investors struggled for the reasons you give and many did indeed lose money. But traders working shorter time frames were able to profit from the swings, be they intra day or over a few days to weeks. The answer then, I believe, is to have two strategies: one which profits in a choppy sideways market and one which profits in a trending market. If you just want to focus on a trending strategy then, as you say, best sit on your hands until the market is trending strongly according to your definition of a strongly trending market. The other possibility is to find instruments (and sectors) which don't bear any correlation to the market as a whole. Equities traders are often able to find bullish stocks in strong up trends while the overall market is tanking.
Tim.

 

[Kunal]

Tim,
Does any strategy exist that profits in a choppy market? By definition, since it isn't moving up or down it effectively becomes a zero sum game. Or maybe suited to daytraders only.

 

[TWI]

The secret is to determine what is chop and what is trend. Once you sort that one out then you will be able to make money regardless of what indications you take.
In choppy markets you sell strength and buy weakness.
In trending markets you buy stregth and sell weakness.

 

[Kunal]

>In choppy markets you sell strength and buy weakness.
If the market is going sideways then it shouldn't matter either way, since the prices are just doing a series of small moves up and down.
Over what time frame are you suggesting this? I'm looking at a 3-4 day holding period which just doesn't work.

 

[apples10]

Hi everyone,
I've done a bit of backtesting on various systems and found that almost any long signal generated by ma, rsi, stoch etc seem to work best when the overall market is in bull mode.
When the market is in bear mode or choppy, the same signals tend to lose or show a very tiny profit.
When systems seem to be so dependent on overall market direction, how do you trade in a bear/choppy market? Or do you only trade when the market is in a bull phase?

Thats just the one market.

Other markets at the same time will be in bull/bear phases.

The game is to know when and where to trade and where to avoid.

'No diagnosis, no prognosis. No prognosis, no profit.

 

[timsk]

Tim,
Does any strategy exist that profits in a choppy market?

Kunal,
Most definitely, although this depends on what you mean by a 'choppy' market. If you conducted a poll and asked traders the market conditions that they liked the best and were the most profitable for them to trade, I suspect the vast majority would opt for a market in a strong, clean trend. Equally, most traders know that most markets are only said to be trending about 30% of the time. When it's not trending, your choice is to either sit on your hands and do nothing or to develop a strategy specifically for these conditions. All of this is somewhat vague and woolly because 'trending' and 'choppy' mean different things to different people.

The attached chart is of the Nasdaq Composite for 2005. Some traders might regard this market as 'flat' or 'range bound' because the net movement over the year is small. Others might regard it as a collection of mini trends which can be played (and doubtless were) for handsome profits. I'd say that only February, June and December are 'choppy' - the remaining months are characterised by a succession of short term mini trends.

Obviously I've no idea what instrument(s) you trade but , looking at this chart, it's clear that there are many opportunities to swing trade with a 3-4 day holding period. If you're looking for inspiration to develop your own strategy or want an 'off the peg' one - then 'Marc Rivalland on Swing Trading' would be my first port of call if I were in your shoes.
HTH
Tim.

 

[RUDEBOY]

Kuntal, ask the butcher about 'choppy'? Then ask him about TF's on the markets? If you want choppy you'll get it. How to get around choppy on an intraday basis is discretionary. See volume. Do you want to trade choppy markets?

 

[Kunal]

Thanks for your excellent replies timsk.
Yes, most of my trader friends love to trade when the market is trending strongly, however as you have rightly pointed out this leads to long periods of inactivity
Started looking for stocks not correlated to the market and it defnitely holds promise. Most of my testing is on Amibroker, I find it really fast.
I'm sure there is no software that would provide a correlation "percentage", so do you manually do this comparison or is there something I missed?
rudeboy, yes I am looking for ways to trade when conditions are not exactly ideal. Any ideas?

 

[commanderco]

The secret is to determine what is chop and what is trend. Once you sort that one out then you will be able to make money regardless of what indications you take.
In choppy markets you sell strength and buy weakness.
In trending markets you buy stregth and sell weakness.

Wise, very wise ... so easily overlooked in the quest for pain free perfection.
Your advice is the start to making good net points.

 

[timsk]

Started looking for stocks not correlated to the market and it defnitely holds promise. Most of my testing is on Amibroker, I find it really fast.
I'm sure there is no software that would provide a correlation "percentage", so do you manually do this comparison or is there something I missed?

Kunal,
Time for me to 'fess up and put my cards on the table. I thought your opening post was/is an interesting one and hoped that it would attract a more comprehensive response from other traders more experienced than me. To be fair, a few have responded - and made some good points. I'm still at the stage of trying to work out a solution to the same conundrum as you, so I don't have many answers I'm afraid!

The quoted extract from your last post implies that you are pursuing a mechanical route? Most charting packages will enable you to conduct a simple scan for trending stocks and sectors. An approach often put forward by the pro's is to find a strong sector and then select the strongest performers within it and, conversely, look to short the weakest stocks in a weak sector. The correlation with the indices is to try to ensure that you're not long a strong stock in an advancing sector when the main market index is showing signs of weakness - even if the longer term trend is up - if that makes sense?

If you are interested in taking these ideas further, you might like to check out the offerings of dbphoenix. He has his detractors as well as his devotees, but there is little argument that he writes very well and fans away some of the mists that engulf such murky topics as 'trend' and 'choppy' etc. Just my opinion, others will disagree, strongly!
Happy Christmas,
Tim.

 

[Kunal]

Thats Ok. The posts you made anyway are very valid and informative.
Looks like there is no software to do correlation scans so I'll probably have to write it myself. Would be pretty easy anyway. The point is whether it's worth the time?
I'll send you a copy if you think it would be useful. Thanks again for all your help.
Happy Christmas.