The wrong interpretation of the affirmation that the markets change
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It is common in the trading literature to hear that the markets change. You can read this in books or trading magazines. You can find a lot of examples where they tell us stories about traders who were performing well in the past and they haven’t adapted their trading method finished losing all their money. But beware because the affirmation creates confusion. So from one point of view it’s a good advice to adapt your trading method or system, but we can do it too early.
Changing the strategy when it stops generating profits
It sounds like a good advice. There is no reason to trade a method that makes you lose money. But when it’s time to change the strategy?
Did it happen to you that after a series of loses you asked yourself if your trading method stopped to work, so you decided to change it? It happened to me a lot of times. First when I was using mainly the demo account for testing strategies I was finding the books. Then it continued to happen when I finally opened the real accounts. At the very beginning, when I was finding some strategies in the books I was reading, I tried to apply the strategy on the demo account and if I had a couple of loses, I was thinking that the market had changed. So I continued my path to searching new strategies. Later I developed my own strategy. I tested it for a couple of months and then I opened a real account. I made a couple of profitable trades, but after two loses I started asking myself. “Did the market change? Should I stop trading? Should I search for another strategy?” I thought that the market had changed, so unfortunately I completely abandoned that trading method and I tried to create other methods. So I don’t know how the method would have performed. I don’t think it really stopped to work. It’s a normal thing to have a losing streak, but I didn’t understand this when I opened that FOREX trading account. I should have continued to trade the same method. I understood this later.
Changing the strategy when it stops generating signals
The master trader, who tutored me, told me several times to forget FOREX and to start trading futures. So the last year I opened a futures trading account. While I was testing what he had taught me, I observed other pattern that later became my trading signal. I tested it and I liked the results. When I decided to trade it the volatility dropped suddenly and I wasn’t able to apply that strategy anymore.
Now I’ve learned the lesson and at the end of summer when the Russell contract became less volatile. The price didn’t move enough, for me to make profits. Maybe I should have increased the timeframe, but I was afraid to trade on it because I didn’t test the method on higher time frame. But this time I didn’t throw away the method I was using. I continued to look at the Russell’s chart and finally after some time, the method started to generate signals again. This enforced the bias that should not forget a method if it stops to work.
My point of view based on the Elliott wave principle
Describing the Elliott wave principle is not the purpose of this article. On the Internet you may find plenty information about it. I’ll just focus on the fact that based on the wave we are in the market will move in a different way on lower time frames. Let’s assume that while in the third wave, you come out with the strategy to buy the highs. The price always moves quickly in your direction and you make profits. You are happy and you think that you are finally a successful trader. But as soon as the fourth wave begins, you realize that you are not winning, because the market is moving sideways. Now you have to adjust your strategy, because buying tops in a sideways market will lead you to losing money.
The master trader’s point of view
As I have mentioned before a lot of authors of the books about trading stated that the markets change, and we have to adapt our trading strategy. But what do they really mean by the affirmation that the markets change? The master trader who tutored me gave me an example of the change. He said that he had to adjust his trade management when the markets became fully electronic and very volatile. This is the example of only one author of trading books, but I think that there are a lot of other traders who were trading in that period that would say the same thing.
Conclusions
When you realize that you are not making profits after series of trades, not just after a couple of consecutive loses, stop trading and try to figure out why. If you realize that the market has changed, try to adjust your strategy. Depending on your trading method it can be enough to adapt to the current market conditions the stop loss and the profit target.
If the market changes and you can’t apply the rules of your strategy, while searching and testing other methods, keep an eye on the markets to see if the old trading strategy didn’t start to generate signals again.
Try to apply the strategy on more trading contracts/pairs, this way when one contract doesn’t generate signals, the other one may generate them. The only problem with this solution may be that you may need to adapt the strategy to be able to trade it on other contracts.
from Easy Trading Academy