Market Behaviour Question?

[cd173]

Good Morning Everyone

Maybe a silly question............
Does anyone have an opinion on why a particular trading strategy works well on some indices, but not others? ie I have one that works well on the DAX but not so good on the DOW. Could liquidity be an issue or time frame perhaps?
Also, has anyone successfully traded a strategy on an index only for it to fail further down the line and become better suited to a different index?

All thoughts and opinions welcomed!

Cheers
Chris

 

[wisestguy]

volatility differences between indecies.

 

[tomorton]

Hi cd173 -

Good question, it may seem so obvious it hasn't received proper attention (that I've seen).

It is sometimes said that a strategy for shares will not necessarily work with an index or a commodity, and I can accept that. I can also accept that some instruments within a similar class, like indices, behave differently from each other - this may be because there are different constituents who make up the markets, with different financial objectives, timescales etc.

It is often said that all strategies eventually fail. But doesn't that just demonstrate that poor strategies eventually fail? Which is obviously true. And statistically, the market must sometimes do something unexpected, so in effect you acted on a false signal, but that shouldn't make the strategy a bad strategy, its jus that statistically nothing is going to behave as predicted in complicated situations 100% of the time - after all, look at the weather.

But do all good strategies fail?

 

[cd173]

Tomorton

Good point you made about failing strategies. Surely if your strategies are not to ambitious, as in market not needing to trend, and you follow a system based on price....why would it fail if it has worked well over say the last 2 years? If you are following an index based on it's price a good system will tell you when not to trade, wouldn't it?
I can understand strategies failing during the summer months due to low volumes, but I'd like to know if a strategy has become redundant over a period of time for anyone?

Thanks
C

 

[TheBramble]

Without wishing to appear Zen-like, everything will work, now and again, for a while, until it doesn't.

What is important is recognising what is working and what is not and not trying to force anything.

On a more pragmatic level and in some way an answer to the original question: different people ae in the markets at different times. Not always with the same intent. Underlying factors change. Seasons change as do less well known cycles of a natural variety.

 

[tomorton]

Hi.

I'm sure you're right cd173 about low summer volumes - many people stay light or out altogether then. Same goes for the run-up to Christmas: Marc Rivalland is specific about this - no trades after 7/12 he says. I guess a fully rounded strategy would automatically factor volume in, like any other relevant indicator.

But Bramble, I can't accept a GOOD strategy will fail without a visible reason. That seems more to me like the converse situation - a BAD strategy will sometimes work, in the way a stopped clock will be right twice a day.

Maybe we can get more specific about the causes of strategy total failure - volume has been given - anybody noted any others in practice?

 

[trendie]

Light volume over summer: is there a saying of "sell in May and go away " ?

Anyway, part of a good strategy is to put parameters on when it is working.

When the market behaves outside of the parameters, dont trade that strategy.

eg: only use trend-following when there is a clear trend to follow.
if the market is ranging, then apply oscilator strategy etc, or wait until the trend resumes.

Strategies fail when people blindly apply rules, when those rules are inappropriate to the market conditions.

We have to have a range of startegies to cope with a range of market conditions.
And apply the correct strategy according to the prevailing market condition.

If you have only one strategy, you will end up trying to force an interpretation that isnt valid, giving the impression the strategy has failed, when in fact it is the interpretaion that has failed.

"If the only tool in your box is a hammer, you tend to see all your problems as a nail".

 

[tomorton]

Very wise, trendie.

 

[c6ackp]

Strategy Iraqi Freedom

I had a relative value dow/ftse strategy which worked very well for a period of several weeks. I managed 17 winning trades out of 20. However, specific trading ideas will generally have a shelf life as the market becomes wise or there's a fundamental underlying shift.

I finally figured out why my strategy blew-up after several weeks: the dow is more heavily biassed towards recovery stocks such as tech stocks than the ftse which has a more conservative composition that is more suited to steady growth. Once the economic indicators picked up the dow and the ftse diverged and kept diverging for weeks.

Also, Saddam being found in a hole didn't help!

This was a fundamental strategy - I don't see why good TA based strategies shouldn't continue to work, with a little refinement here and there...

Happy Trading.

Steve