Adrian Reid explains why trading strategies fail when market conditions shift. He recommends building systems with rules that activate or deactivate based on market context, backtesting across decades to find when each strategy works, and moving to systematic trading to apply rules consistently.
Have you ever noticed that the market just seems to be constantly changing? It can be so frustrating, right? Because one day you think you're in sync with the market and you're making money, and then the next day some big news announcement changes the character of the market and all of a sudden you're out of sync and you're losing money. My name is Adrian Reed. This is Enlightened Stock Trading. And in this video series we're talking about real stock trading tips that set you up for a lifetime of profitable trading. And today's tip in this video is that market conditions change. So make sure your system adapts or, or has an off switch. So here's the thing. Not every trading strategy will make money all the time. So what you need to know is when does your trading system or your trading strategy work? And make sure you only use it when it actually works. Now, trading systems, like what you find in the trader success system, have rules that turn them on and turn them off depending on whether they're in sync with the market. So we'll only activate our trend following system when the stock index is moving up and the stock market is moving smoothly. We'll only activate our mean reversion system when the stocks are behaving exactly the right way. You're not going to just keep following the rules when they're out of sync with the market. If you've got an indicator based system like you say you buy when the RSI does this or when the moving average does that, and you just reply that blindly all the time, chances are it's only going to work under certain market conditions. So the trouble with technical analysis and indicator based rules like that is often they're not holistic enough. Okay, if you put all of those indicators into a trading system, a complete system, then you can test that system across 30 years of stock market history and you can look at whether that system makes money when the index is going up, when the index is going down, or when it's going sideways. You can also look at whether that system makes money when the market is volatile or when the market is trending quietly. And by doing that sort of analysis with your backtesting software like amibroker, what that allows you to do is determine when you should turn that system off. And let's say your system only works when you trigger in the stock index is moving up. Okay? You would have an off switch or a rule in your system that prevents any new buy signals from coming when the index is going down. Okay? So you don't actually have to consciously turn the system on or off. What you do is you put a rule into the system which prevents new signals or exits old signals when the the system is out of sync with the market. Okay, so a complete trading system has rules like that that will keep it in sync with the market and stop it trading when it's not in sync with the market. So if you're trading with discretion and you've got a strategy that you use, you got to make sure you understand the broad context of when that strategy works and when it doesn't. But if you really want to nail this and take your trading to the next level, it's time to move from discretionary trading to systematic trading. So can really make your trading consistent and apply the rules when they're in sync with the market and back test it to build confidence that that's the right thing to do. And when, when you understand exactly when your rules will make money and when they won't. So you only use them at the right times. Okay, so market conditions change. Make sure your system adapts or have has an off switch so that you don't just blindly follow signals that are out of sync with the market. My name's Adrian Reed. This is Enlightened Stock Trading and we are giving trading tips to set you up for a lifetime of profitable trading. If you've got any questions, comment at the bottom of this post and I'll see you in the next video. Bye for now.
