Over the past couple of years, I’ve had the privilege of working with traders from all different types of backgrounds and experience levels. During this time, I have noticed certain areas that traders tend to get stuck in. One area that comes up often is deciding when it is time to switch the markets that you trade. I have personally gone through this in the past few weeks, as changes have been made to the markets I look at for the first time in two years.
Having a universal trading strategy in our toolbox does allow us to trade all markets and time frames. Unfortunately, traders often times use this feature incorrectly. I always recommend that my students find a few markets that fit their trading style. If you are more of a conservative trader,find a few markets that move a little slower. If you like the fast paced action, look to some of the more volatile markets.The key is to find a market and commit to it. One of the biggest mistakes a trader can make is to switch markets ona regular basis. Trading the mini Russell a couple of days a week while looking at forex the rest of the time is a recipe for disaster.
Keep in mind we have a system that puts the odds in our favor. The only way we can take advantage of those odds is to take the trades consistently in a given market according to a detailed trade plan. Cherry picking trades on different days or in different markets will never lead to consistent results. You will find yourself missing out on the winning trades and catching all the losers. Don’t let a minor losing streak cause you to lose confidence in the system. If we are sticking to our guidelines of choosing the right marketsand time frames, then over an extended number of trades, the odds will play out in our favor.
Now on the flip side of things, at what point should you consider switching markets? We don’t want to force a market and time frame to work when the system is working well on so many different markets. The key is to keep a record of your trades on a daily basis in a trade journal. At the end of the month, go back and review the results for your given market. You then have the opportunity to analyze whether or not the results are satisfactory. If you find that the market really seems to be slowing down, then move onto another market. Notice that I am not recommending you do this on a weekly basis. Markets will have down days or even weeks from time to time. That doesn’t mean amarket is broken. If we start to see an extended draw down then you know it’s time to move on to another market.
I personally traded bonds for the past two years on a daily basis only to see the volatility fall out of these markets over the past month or two. I don’t want to force these markets to work when other markets like currencies or crude oil are working so well. All I have to do is create a trade plan for one of the other markets and make the change. Before I made this change, here are some of the key points I considered:
1. Consider your winning percentage and profit factor at the end of each month. If these are showing a decline in performance over an extended period of time then it is time to consider other options. As a rule, keep in mind that we like to see a 2/3 win rate with our systems.
2. Are your trade profiles shrinking? One of the biggest clues that you can use when gauging volatility is tolook at the trade profiles. If they are getting smaller and smaller then you know it might be time to consider a change.
3. Keep a forward test going of other markets thatyou aren’t necessarily trading. If these markets are outperforming your market over an extended periodof time, give some thought to a change.
4. Do not over react to a minor losing streak. If youhave 5-6 losers in a row, that doesn’t mean a market is broken. If however, in your monthly analysis you see an extended period of draw down then it might be time to consider other options.
5. Do not change on a regular basis. Let the odds play out in your favor over an extended period of time. Stay consistent with your approach and be slow to change.
The best traders I know are aware of the markets that fit their trading style. They specialize in a handful of markets, which allows them to master the art of trading in those markets. Don’t panic when you hit a losing streak. At the same time, don’t be afraid to give up a market that you havealways traded if you find other markets to be producing better results.
