How To Ensure Your Trading Systems Work in All Market Conditions

There are good years and bad years. There are easy years to make money, and there are more challenging years. But what you do is you start with broad market behaviour. The market can either be the stock market, crypto, commodities, or any market you want to trade, it can only do certain things. It can go up, sideways or down, in the broader sense. And within those three things, that trend can either continue, there can be a temporary shock against that trend or it can change. That gives us a three-by-three matrix of the behaviour that could happen.

If the market’s going up, it can turn around and start going down. Do we have to care that it’s COVID, or that it’s the financial crisis, or that some crazy person got elected as president, or the interest rates went up, or some crazy person invaded another country or any of those things? We don’t have to predict those things. What we have to know is what the market could do. If it’s going up, it could keep going up, dip, or change to either a sideways or a downtrend.

My rules don’t have to make money in those conditions. They have to make money where they know how to make money and stand aside where they don’t know how to make money. If I’m trend following and I have a set of rules, those rules will work better when the broader market and the S&P is going up. I might have another rule that says, if the S&P is going up and the stock is going up, then buy the stock, and sell the stock if the stock starts going down or the S&P starts going down because it’s the broad conditions that set you up for success, as well as the individual stock you’re buying.

You don’t want to try and make money with one set of rules all the time because that one set won’t work. As of the recording time, we’re in a bear market and I’m pretty sure the S&P just dipped below that 20% from the high, which is the technical definition of a bear market. But it’s been going down for a while, so I don’t want to buy and hold, hoping stocks go up, just like I don’t want to buy and hold Bitcoin, hoping Bitcoin’s going to go up. Bitcoin’s gone from 69,000 to 20,000. That’s not going up because it’s in a downtrend. I’m not holding it, trying to hope for it to go up. I sold it short, so I could profit from it going down and my rules will tell me to do that.

So if you have those systematic rules that make money in different market conditions, it doesn’t matter what the market does.