When traders cite to the hard trading environment, they oft brand reference to "choppy" or "noisy" markets. Usually their adjacent sentences lament the "algos" together with their comport on upon markets. I detect these to endure expressions of frustration, non constructive formulations of trading challenges. Invariably, those lamenting choppy markets dominated past times algos that "manipulate" markets engage inward their venting--and therefore become dorsum to trading every bit they've ever traded...and continue to lose money.
A telephone substitution to agreement the recent hapless returns of curt term traders is to appreciate that these traders don't exactly lack an edge; they conduct maintain a negative edge. What they are doing, which largely falls into the category of trend/momentum trading, is systematically non working over time. Waiting for high Sharpe trends to provide to markets has non been a audio describe of piece of job concern model. But peradventure nosotros tin merchandise inward a agency that benefits from anti-trending/mean reversion every bit good every bit momentum.
In coming months, I volition endure rolling out an approach that I cite to every bit Cyclically Adaptive Trading (CAT). The meat stance behind the strategy is that all markets comprise linear, directional elements (trends) together with cyclical elements. On a given fourth dimension frame, a "noisy" or "choppy" surround is simply i inward which the cyclical aspects of marketplace behaviour dominate the linear ones. Note that whatever marketplace cycle itself has linear (rising together with falling) components together with make saltation ones (topping together with bottoming). Very often, what is a tendency on i fourth dimension scale is a percentage of a longer-term cycle. The interaction of cycles over multiple fourth dimension frames creates challenging irregularities, every bit markets switch betwixt mean-reverting together with trending phases.
The stance of CAT is that you lot trade the market's personality, non your own. Instead of trading the fourth dimension frame together with style you lot travel on to prefer, you lot merchandise the cycles setting upward inward markets. Because in that location are multiple cycles at travel at whatever i fourth dimension together with because the dynamics of the electrical flow cycles are influenced past times the activity of prior cycles, we tin seat dominant cycles inward existent fourth dimension together with adjust trading parameters to those. This is the adaptive chemical element inward cyclically adaptive trading. The argue therefore many traders are failing is that they lock themselves into preferred fourth dimension frames together with trading styles. An adaptive approach is i that trades momentum/trend when nosotros are inward the rising together with falling phases of cycles together with i that trades inward a value/mean-reverting style when nosotros are inward the topping together with bottoming phases. We merchandise longer-term when longer-term cycles dominate together with shorter-term when nosotros run into those "choppier" conditions. Trading i fourth dimension frame inward i style systematically fails over fourth dimension inward markets possessing potent cyclical elements.
(A corollary is that, to the flat you lot seat yourself, say, every bit a directional trader or a short-term trader, you lot are likely losing money. Someone who limits themselves to trading i facet of marketplace cycles is similar a baseball game hitter who specializes inward hitting fast balls. If you lot larn plenty of those guys on a team, it doesn't conduct maintain the opposition long to set breaking ball together with off-speed pitchers on the mound.)
A 2nd major stance behind CAT is that cycles are self organizing: recent cycles comport on the creation of novel cycles which interact to generate other, unlike cycles. There is no unmarried periodicity to cycles that tin endure traded mechanically and, indeed, I conduct maintain doubts that cycles fifty-fifty be inward chronological time. Markets displace inward event units of cost motility together with volume: every bit participants travel inward together with larn out markets, they comport on cycles inward ways that comport on futurity cost behavior. In other words, cycles are a component subdivision of the behaviour of marketplace participants, non a component subdivision of the passage of fourth dimension on a clock. Our project every bit traders is to adapt to the market's clock together with trade inward marketplace time, non our time.
The trading I am rolling out is based upon an advance I've made inward tracking the self-organization of cycles over multiple effect fourth dimension horizons.
Some sources of insight into marketplace cycles tin endure flora inward the early on technical industrial plant of George Lindsay together with Terry Laundry. Important quantitative perspectives together with tools conduct maintain been offered past times John Ehlers, who introduced the notion of adapting technical trading systems to dominant cycle periods. Relevant posts seem below, together with I volition endure posting to a greater extent than every bit I formally curl this out inward my trading.
Further Reading:
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