Market Adaptive Trading

Using the same trading technique and exit strategy in all market conditions is likely to give you lots of practice at taking drawdowns. There is no single technique that magically works in all markets, no matter what those slick brochures we all get in the mail say. Experienced traders have a ‘tool box’ of different techniques that have been tested in different market conditions, and select the right ones for the current market.

I have a dozen different scans that I run every evening. There are scans that look for Long and Short Pullback set up’s, volume accumulation, volume distribution, and various patterns. I have tested these scans in Bullish, Bearish, and Trading (sideways) Market periods; so I know which ones to use in a given Market environment. These scans constitute my Trading Toolbox. Prior to trading, I analyze the Market to determine which tool is right for the job.

It is the mastery of several different aspects of trading including system development, backtesting, exit strategies, and reading the market, that leads to success. It takes time, and it will cost you something to learn. Mastering the trading profession, like many other professions, can be well worth the tuition you invest. Traders develop their skills by working with someone experienced in the field. You don’t become a surgeon, or pilot, or engineer by reading a book then starting a business. These professionals learn by working with someone until they master the techniques, traders should do the same.

Analyzing Market Conditions:

Learning to trade with the Market is one of the keys to taking results to the next level. Looking at Figure 1, it’s clear that Long strategies with holding periods measured in Months were not trading with the Market during the 2000-2002 period. There are some Long strategies with short holding periods that worked during this period. There are also a number of Short strategies that worked during this period. Trading with the Market requires one to have a variety of strategies that are known to work in different Market environments, and a method for determining which strategy to use.

Analyzing Market conditions is so important that I write down my observations each evening as I prepare for the next trading day. I started sharing these observations with my friends, which encouraged me to focus on an objective look at the Market.

I try not to be Bullish or Bearish, I just focus on determining key support and resistance levels, and what these levels imply for trading. If you decide you’re Bullish or Bearish there is a tendency to then find reasons to justify your position, especially if you follow the news. Instead, determine what type of market environment it is, and what that implies about which of the tools in your toolbox should be used.

I have found NASDAQ trend lines and moving averages to be effective tools for determining which trading tools should be used. During backtesting I have found that several of my trading systems respond well to limiting Long Entries to periods when the QQQ is above it’s 30 day simple average. I also use trend lines on the NASDAQ to determine whether to focus on Long or Short scans as shown in Figure 2.

Figure 2 shows a one-year period where the NASDAQ was basically unchanged. A long-term position trader may have broken even for the year. When the NASDAQ was below the descending trend line I would focus on Short set up’s for swing trades. When the NASDAQ broke the descending trend line I began to focus more on Long set up’s for swing trades. This is part of the process of selecting the best tool for the job.

Figure 2 is a close up of the break out of the descending Trend Line shown in Figure 1. The first ascending Trend Line after the break was drawn through the lows in early April and late May. As long as the NASDAQ was above this Trend Line, I continued to focus on Long Set up’s. The break of this Trend Line in Early August caused me to stop taking Long Trades. A Trend Line break implies a change, which could be a basing period or the beginning of a retracement. I do not begin taking Short Swing trades unless there is a lower low formed after a Trend Line Break.

The retracement of early August in Figure 2 did not form a lower low, so I redrew the upward sloping trend line through the new low as shown on the chart. This new trend line then became one of the filters for determining whether or not to continue taking new Long entries.

When the Market is in a clear trend as shown in Figure 2, I generally use my tools for Swing or Intermediate term trades. When the Market is range bound as shown in Figure 3, I generally focus on Short Term or Swing trades. The pattern set up’s for all three types of trading are similar. The Market conditions tell me which type of trading to do, and the type of trading determines the Stop strategy.

Matching Trading Techniques to Market Conditions

Short Term Trading involves just playing the breakout period. I typically sell after 1-3 days, or a profit of $1.50 or 4%. This approach can be profitable in range bound markets like that of Figure 3 where longer term trading just churns the account.

Swing Trading involves placing an initial stop under the low of the set up pattern and trailing the stop as the trade moves up. This tends to be more profitable than Short Term trading when the Market is trending.

Intermediate Term trading starts with an initial stop under the low of the set up pattern and typically holds as long as Market conditions remain favorable. I will sell when the Stock or the Market breaks a key Trend Line or shows signs of topping.

A range bound market such as shown in Figure 3 is a good place to use Short Term or Swing Trading techniques. In the third week of November the Market was retesting the recent low set in late October. This type of situation can provide a reasonable risk entry for new Long set up’s, if the Market shows a clear bounce off the lows as it did with the large white candle the fourth week of November. The reason for reduced risk is that if the bounce fails, and the Market were to drop below the support level of the previous four bars, it would be a signal the Market was not ready to move to the top of the range and the Longs could be quickly exited. It is usually best to trade with the Market trend.

As the Market approached the recent high (early November, Figure 3) Short Term Traders would consider exiting Long positions in case the Market retraces from the retest of recent highs. The Short Term Trader locks in profits as a range bound Market approaches resistance; and then prepares to trade the short side if the Market bounces off resistance, or the Long side again if the Market breaks through the resistance level. When the market is in an extended basing period this can be an effective technique.

Eventually the Market will break out of a basing area, which provides another reasonable risk entry in the direction of the break. The reason for reduced risk is that if the market should retrace and reenter the basing area, a false breakout may be assumed and trades can be quickly closed. A breakout from a basing area is often a time to move from Short Term Trading to Swing or Intermediate Term Trading.

Intermediate term trading techniques are best used when the Market is in a clear trend. New trends often start with the break of an intermediate or long-term trend line, or a successful retest of a base breakout. In cases like this consider Swing Trading until the Market has established a higher low. After a higher low is established use it to draw a trend line and consider Intermediate term trading techniques until the trend line is broken.

The break of the descending trend line in Figure 2 took a few weeks for the Market to sort out. This is one reason that I don’t immediately start Intermediate term trading when a trend line is broken by a point or two. To use Intermediate term trading rules the trend must be clear, which is usually not the case until a higher low has been established. From the time of the trend line break until a higher low is formed consider using Short or Swing Trading techniques. Once a higher low has been formed (mid May of Figure 2) a trend line can be drawn and used to determine when to close intermediate term trades.

These techniques are not exclusive. Up-trends will frequently be channels where both Intermediate and Short Term Trading techniques may be used. Short term trading in a channel involves entering Longs as the Market bounces off the bottom of the channel, and closing them as the Market approaches the upper channel boundary. Short Term Short positions may be established as the Market bounces off the top of the channel and returns to the lower channel boundary. Shorting counter trend is for the experienced trader, and should be very short term.


The Market is a strong force that influences the outcome of most trades. Taking all trades generated by a system regardless of Market conditions will likely give you lots of practice at taking draw downs and stop losses. Having different systems that test well for Bull, Bear, and sideways Markets and selecting the right tool for the current Market conditions can improve your results.

Rather than focusing on Short, Intermediate, or Long Term trading consider developing expertise in all three and letting Market conditions determine which set of rules to use.
The Timely Trades Letter reflects my current trading strategy, provides powerful set up’s for the current market based on extensively tested techniques, an insightful market analysis to help you know when to trade and when to stand aside.