What Types of Market Conditions Are You Profitable In?

When you were designing your binary options online trading system, one aspect you hopefully focused some time and energy on was figuring out which market contexts were best. It is a common newbie mistake to assume that a setup is simply your price action pattern or your set of indicator signals saying “buy” or “sell,” but market conditions also say “buy” or “sell.” Your setup extends to the context for that price pattern or those indicator signals. The shape of the market matters. A price pattern which is great in a ranging market might be useless in a trending market. An indicator signal that works well in a trending market could be worthless when the market is sideways, and so on.

It is wise not only to think about market context in advance, but also to go back and look at it after you have been trading for a while. For many traders, it is one of the most challenging aspects of trading to get a solid grasp on. When you go back over your past performance and see what types of markets you have historically performed well in, and which types of markets you have performed poorly in, you may be able to revise your future techniques.

How do you do this? I exercise where you not only go back over your spreadsheets and trading journal, but get out your charts and look back at them simultaneously. Even if you took good notes, they may not be enough. Remember, in many ways the purpose of this exercise is to refine your understanding of what constitutes a particular set of market conditions. As a result, your old notes saying that a certain trade took place during a certain type of market condition may not actually be as accurate as you think. Conditions you previously said were choppy you might now evaluate as quite reasonable. Or another trade you thought you took during an entirely reliable time period, you might now re-evaluate as one you should have stayed away from.
 

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Here are the steps to this review exercise:

  1. Decide on a time period for the entire review. Maybe you will look back over the past six months, or the past three years. It is totally up to you.
  2. Scroll through the charts for those time periods. Set your charts for the timeframe you were trading on. You may also want to zoom out one timeframe and go over those charts as well for additional context.
  3. Actually mark your charts to denote different types of markets. Do this before you look at the trades you took. You want to have as clear a view as possible, unobstructed by your feelings about what you did. You can use your own sense for different types of conditions, or you can use an indicator to help you. Mark bullish and bearish trending areas, as well as non-trending regions and choppy areas.
  4. Now go back through and mark out areas of high and low volatility. You can use an indicator to assist you with this as well.
  5. Call up your spreadsheets, and carefully cross-reference them with the periods of volatility you marked on your charts, as well as the periods for trending and non-trending and choppy conditions. Calculate profit and loss for each of these different condition sets. This will tell you how you actually performed in each of these conditions.
  6. Once you have done that basic round of analysis, you can also go back and look at specific trades you took during those times. You may also want to cross-reference with your trading journal and any detailed notes you took at the time to see if there are any discrepancies in what you see now vs. what you thought you saw then.

Here are some questions you can ask yourself while you are doing this exercise:

1. What types of market conditions were you most profitable in?

If you find you are consistently most profitable under certain market conditions, those are the conditions you should look for when you are evaluating future setups. For example, if you find that you achieve the most profit in narrow-ranging markets spotting breakout patterns, you should be especially keen on setups that fit those conditions in the future. If you do best during times of high volatility, look for high volatility conditions when you plan future trades.

2. Were there specific market conditions that caused you to lose money?

Did you consistently lose money under particular market conditions? Learn how to recognize those conditions in the future and you can avoid losing money. You might for example find that you lose money in choppy markets that feature a lot of whipsaws (this is quite common). Or you might find you have a system that does really poorly in ranging conditions. Every system is different. Once you learn to identify these problematic conditions, you can cut back on your losses significantly.

3. In what conditions did you conduct most of your trading?

Did you do most of your trading when volatility was high? When it was low? Did you usually trade when the market was ranging? Trending? Choppy? Calm?

4. In what conditions did you conduct the least of your trading?

Were there times when you didn’t trade? Did your system steer you around unsafe market conditions? Did your own discretionary choices help you navigate those dangerous waters? Were there times you should have traded that you chose not to, and times you did trade when you should not have?

5. What was going on at a higher level?

Sometimes you may need to zoom out to get an understanding of why certain trades fail. If you find for instance that most of your trades for a certain type of price action setup were profitable in bullish conditions, but some of them failed, you might zoom out and find out that at a higher timeframe, conditions were bearish during those failed trades. Going forward, you could prevent those losses by looking at additional timeframes before you place a trade. This is something to carefully test before you go live with it, since looking at new timeframes can send you some conflicting signals. Venture forward cautiously with this kind of revision to your trading method.

6. Did you evaluate conditions differently then than you do now?

Looking back over your spreadsheet and journal entries, check the notes you took for specific trades. If you recorded the market conditions as you perceived them then, compare that to how you read the market conditions now. Do you notice any discrepancies? Were there times for example when market conditions were perfect for trading, but you chose to interpret them as too choppy? Were there other times that you thought conditions looked great when they were really very bad? If so, try to determine why your observations in the past differed. Was it the result of wishful thinking or anxiety? A lack of knowledge? Try to remedy those issues going forward so that you can see through clearer eyes when you evaluate potential trade setups.

7. Are certain types of trades more profitable in certain conditions than in others?

If you take more than one type of trade (several different price action setups, for instance), see if certain types of trades did better under specific market conditions and worse under others. Compare that to your expectations setting out. If you notice anything unexpected, take notes and go forward with new expectations. You might notice that a certain setup that you thought performed optimally during low volume times actually performed better in times of moderate volatility, or that an indicator you thought was best for ranging markets actually did better in trending situations.

8. What could you change to become more profitable in the future?

You may need to test changes to your trading method based on your findings. You might decide to avoid trades you would have taken in the past and take new trades that you would have steered clear of before. If the changes are significant, it may be wise to run a few tests before you go live. Do some and a demo test and see if your profitability climbs. If it does, you can go live with your changes. If not, you may need to conduct further analysis and test again.

This review activity is something you should do regularly while you are learning about market conditions. Each time you do it, you will not only discover more about your trading method, but also fine-tune your pattern recognition skills and your grasp of context. I recommend doing it quarterly or maybe a couple of times a year. Starting out, you may want to do it every couple of months. Over time, these reviews should lead to an intuitive understanding of volatility and market movements which will help you to read the charts like a book.

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