Match Your Trading Style with the Market

Apr 23, 2015: 10:23 AM CST

If you’re a developing trader, how would you describe your trading style?

If you’re a new trader, it can be helpful to learn what different types of trading strategies are available and then focus on learning and practicing the ones that match your personality, risk-tolerance, and current understanding of the market (which will evolve in time).

For those of you who can clearly define your trading style, you’re aware that there are periods in the market when your strategies work better than at other times.

One of the factors of long-term trading success is the ability to adapt to changes in the market, specifically temporary changes that favor or disfavor your type of trading strategy.

Dr. Brett Steenbarger of TraderFeed recently posted an excellent article that inspired me to revisit some of my experiences and different ways I’ve adapted over the years to changes – big and small – in the stock market and commodity markets both as a swing trader and intraday trader.

Be sure to study his post “You Can’t Win if You’re Not Playing the Right Game” and bookmark it for future reference as you develop as a trader, especially if you are new and are current exploring different types of trading methods.

In concise fashion, he lists a few pitfalls that occur when the market environment shifts and a trader fails to adapt and falls into a slump.

This can occur when…

a Momentum-Style Trader faces a low volatility environment;

a Trend-Style Trader tries to trade a choppy, range-bound market;

a Higher Timeframe Trader (possibly investor) is chopped up in very short-term events;

a “Fade” or Reversal-Style Trader is run over in an impulsive trending environment

Taking this a step further,

Momentum Traders typically need volatility, price movement and higher volume periods to take advantage of directional movement that is expected to continue (they join on the side of the price movement typically with retracement or breakout trading strategies);

Trend Traders need an existing trend in a strong stock (market) getting stronger (or a weak stock getting weaker) and will similarly play pro-trend style retracements or even breakouts with the expectation that the trend will continue;

Higher Timeframe Traders play well-researched themes that take time to develop, usually through trading a longer-term trend or positioning ahead of a longer term expected trend reversal;

“Fade” Traders do best in low-volatility, range-bound markets where they can “fade” or trade against short-term bullish movements by shorting into resistance (ideally with divergences) or buying into support (also with divergences)

These are just four types of common strategies traders can deploy.

Frustration and financial losses occur when the market shifts in such a way that a particular style will no longer be as effective in the immediate future.

The goal is to recognize a market shift objectively as soon as possible and then adapt accordingly.

It could just mean behaving more conservatively with your trades until the environment returns to your favored style.

As Dr. Steenbarger reminds us,

Momentum Traders cannot play directional movements in a directionless market;

Trend Traders likewise cannot capture trending profits from a trendless market;

Higher Timeframe “Investor” style traders should not respond to every wiggle or news event on a daily basis;

and Reversal or “Fade” Traders should not fight  a strongly-trending, unidirectional market.

Markets shift from high to low volatility, and from range/consolidation into trend/momentum environments.

Also, market structure and price behavior can be different for each timeframe.

A higher timeframe range/consolidation may occur but there are often very short-term intraday trends that intraday traders can exploit (momentum and trend style traders).

First, know your strategy (which does take time along with trial and error) and then know when the market favors your chosen strategy (when to “go big”) and when conditions have temporarily shifted (when to protect capital).

Corey Rosenbloom, CMT
Afraid to

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Corey’s book The Complete Trading Course (Wiley Finance) is now available along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).


2 Responses to “Match Your Trading Style with the Market”

  1. Sharma Says:

    Yes, it’s so crucial to match our steps with the market; if we do anything out of that then we will always be in trouble. This is also the reason it becomes so vital to learn all ways of trading, if we know all kind of technique then we can trade in any type of market. I am at the moment working with OctaFX broker and I prefer doing long term trading with their lovely Islamic swap free account, it’s major help for me.

  2. Sameer Says:

    Nice article…but their should be a calculator to judge ones risk appetite also 🙂